Fact Check: Is FZFXX tax exempt?

Is FZFXX Tax Exempt?

The claim under investigation is whether the Fidelity Treasury Money Market Fund (FZFXX) is tax-exempt. This question is particularly relevant for investors considering the tax implications of their investments, especially in high-tax states. The tax status of FZFXX may vary based on the proportion of its assets invested in U.S. government securities, which can influence its tax treatment at both federal and state levels.

What We Know

1. General Tax Treatment of Money Market Funds: Money market funds that invest primarily in U.S. government securities often provide tax-exempt interest dividends at the state level, but this is contingent on meeting specific investment thresholds. According to Fidelity, tax-exempt interest dividends from municipal mutual funds are generally exempt from federal income taxes, although they must still be reported on tax returns 1.

2. FZFXX's Composition: FZFXX is composed of various U.S. Treasury securities, including Treasury Bills and Treasury Coupons. However, it also includes a significant portion of repurchase agreements (81.54% as of the latest data), which may not qualify for tax exemption 7.

3. State Tax Exemption: The tax-exempt status of FZFXX varies by state. For instance, it has been noted that FZFXX did not meet the minimum investment in U.S. government securities required for tax exemption in states like California, Connecticut, and New York 2. In contrast, other funds may offer higher percentages of tax-exempt income, depending on their investment strategies 3.

4. Historical Data: In previous years, the percentage of FZFXX's dividends that were exempt from state tax has fluctuated. For example, in 2022, only 29% of its income was derived from U.S. government securities, which raises questions about its tax-exempt status 8.

5. Investor Considerations: Investors in high tax brackets may consider tax-exempt funds to maximize their after-tax returns. However, the lower yield of tax-exempt funds like FZFXX compared to taxable options must also be weighed 5.

Analysis

The claim regarding the tax-exempt status of FZFXX is nuanced and depends heavily on the fund's asset composition and the specific tax laws of the investor's state.

• Reliability of Sources: Fidelity Investments, as the fund manager, provides primary data regarding the fund's composition and tax implications. Their documents 146 are generally reliable, but they may have a vested interest in presenting the fund in a favorable light. Third-party analyses, such as those from financial blogs 25, can provide additional context but may also reflect the biases or interests of the authors.

• Conflicting Information: There is conflicting information regarding the exact percentage of FZFXX's income that is exempt from state taxes. Some sources indicate that a significant portion is taxable in certain states 23, while others suggest that it may still offer some level of tax exemption 8. This discrepancy highlights the importance of consulting multiple sources and possibly seeking professional tax advice.

• Methodological Concerns: The methodology used to calculate the percentage of tax-exempt income can vary between sources, which complicates the assessment of FZFXX's tax status. For example, the calculations may depend on the timing of asset purchases and sales, as well as the specific securities held at the end of the tax year.

Conclusion

Verdict: Partially True

The claim that FZFXX is tax-exempt is partially true, as its tax-exempt status depends on several factors, including the fund's asset composition and the specific tax laws of the investor's state. While FZFXX primarily invests in U.S. Treasury securities, a significant portion of its assets is in repurchase agreements, which may not qualify for tax exemption. Additionally, the fund has not consistently met the thresholds required for state tax exemption in certain states, leading to variability in its tax treatment.

It is important to note that the evidence regarding FZFXX's tax status is not definitive and varies by state and over time. The percentage of tax-exempt income can fluctuate based on the fund's holdings and market conditions, which introduces uncertainty into the assessment of its tax-exempt status.

Readers are encouraged to critically evaluate information regarding tax implications and consider consulting with a tax professional to understand how these factors may apply to their individual circumstances.

Sources

1. Fidelity Investments. "2024 Tax-Exempt Income from Fidelity Funds." Fidelity PDF
2. My Money Blog. "Fidelity Money Market Funds: Claim Your State Income Tax Exemption." My Money Blog
3. Bogleheads Forum. "Fidelity treasury money market (FZFXX) subject to state tax?" Bogleheads
4. Fidelity Investments. "FZFXX - Fidelity ® Treasury Money Market Fund." Fidelity Fund Research
5. The Finance Buff. "Which Fidelity Money Market Fund Is the Best at Your Tax Rates." The Finance Buff
6. Fidelity Investments. "2024 Percentage of Income from U.S. Government Securities." Fidelity PDF
7. JustAnswer. "A person invests in FZFXX from fidelity." JustAnswer
8. The Finance Buff. "Claim State Tax Free Interest in TurboTax, H&R Block, FreeTaxUSA." The Finance Buff