Line 20: Interest Income on Bonds of Other States

Here’s the part that trips up transplants. Municipal bond interest is tax-free on your federal return — always has been (IRC § 103). But New York only exempts muni bond interest from New York and NYC issuers. If you’re holding California, Texas, or Florida munis? That interest gets added back to your New York income right here on Line 20. It’s an addition, not a subtraction. Your NY taxable income goes up.

Why This Addition Exists

Every state wants to encourage its own residents to buy its own bonds. New York does this by exempting NY-issued muni interest from state tax while taxing interest from every other state’s bonds (NY Tax Law § 612(b)(1)). The logic is straightforward: if you’re a New York resident benefiting from New York services, New York wants its cut on income from other states’ debt.

The federal government doesn’t care which state issued the bond — all muni interest is federally exempt under IRC § 103. But states play by their own rules, and New York’s rule is simple: ours are exempt, theirs aren’t.

Which Bonds Are Exempt vs. Taxable

Exempt from NY Tax (Don’t Add on Line 20)

New York State bonds — Including NY Thruway Authority, Dormitory Authority, Metropolitan Transportation Authority bonds, and any obligation issued by NY or its political subdivisions
NYC municipal bonds — NYC general obligation bonds, NYC Transitional Finance Authority, NYC Municipal Water Finance Authority
Puerto Rico, Virgin Islands, and Guam bonds — These U.S. territory bonds are exempt from all state taxes nationwide under federal law (48 U.S.C. § 745). Oddly, this makes PR munis triple-tax-free: no federal, no state, no local tax anywhere in the country.

Taxable to NY (Add on Line 20)

California munis — Popular with high-income investors, but fully taxable in NY
New Jersey munis — Even though you can see Jersey City from your apartment window, the interest is taxable
Any other state’s municipal bonds — All 49 other states, their cities, counties, school districts, and special authorities

The Mutual Fund Problem

Most people don’t hold individual muni bonds. They hold municipal bond mutual funds or ETFs — Vanguard Tax-Exempt Bond Fund, iShares National Muni Bond ETF, Fidelity Municipal Income Fund, that sort of thing. These funds hold bonds from dozens of states.

Your fund company sends a state-by-state breakdown each year, usually in a supplemental tax document separate from your 1099-DIV. It’ll show something like: 12% New York, 15% California, 8% Texas, and so on. You only need to add the non-NY portion on Line 20.

If your fund paid $5,000 in tax-exempt interest and the state breakdown shows 12% from NY, then $600 is NY-exempt and $4,400 gets added on Line 20. The math isn’t hard, but finding the breakdown document sometimes is. Check your brokerage’s tax center — it’s usually posted in February.

NY-Specific Muni Funds

Funds like Vanguard New York Long-Term Tax-Exempt Fund (VNYTX) or BlackRock New York Municipal Opportunities Fund hold exclusively NY-issued bonds. If you’re a NY resident and care about minimizing Line 20, these are worth considering. The yields are often slightly lower than national muni funds because everyone in NY is chasing the same tax benefit, pushing prices up and yields down.

The Transplant Trap

Moved to New York from another state and kept your old bond portfolio? This is the most common way people get caught. You had $200,000 in your home state’s muni bond fund while you lived there — completely tax-free at both federal and state levels. You move to NY, and suddenly that interest is taxable on your NY return at rates up to 10.9% (plus NYC tax of up to 3.876% if you’re in the city).

A $200,000 position in out-of-state munis yielding 3.5% generates $7,000 in interest. At a combined NY/NYC rate of roughly 14%, that’s about $980 in state and city tax you weren’t paying before. Not catastrophic, but enough to make restructuring the portfolio worth a conversation with your advisor.

Relationship to Line 23

Don’t confuse Line 20 with Line 23. Line 20 adds income (out-of-state muni interest). Line 23 subtracts income (U.S. government bond interest). They move in opposite directions. One makes your NY taxable income higher, the other makes it lower. Federal bond interest — Treasuries, savings bonds, TIPS — is constitutionally exempt from state taxation and gets subtracted on Line 23. Muni bonds from other states get no such protection.

For more on how taxable interest on Line 8 connects to these adjustments, see our interest income breakdown.

Common Mistakes

Adding NY muni interest on Line 20 when you shouldn’t. If it’s from a NY issuer, it stays exempt — don’t add it back.

Forgetting the mutual fund breakdown entirely. Some people see “tax-exempt interest” on their 1099 and assume it’s exempt from everything. It’s exempt federally. New York has its own opinion.

Missing the Puerto Rico carve-out. PR bonds are exempt from NY tax. If your national muni fund holds 5% in Puerto Rico munis, that 5% shouldn’t be added on Line 20 either.

Sources & References

Common Questions

Are New Jersey municipal bonds taxable on my NY return?

Yes. New Jersey muni bond interest is federally exempt but taxable to New York. You’d add the interest on Line 20. Only bonds issued by New York State, its localities (including NYC), and U.S. territories are exempt from NY state income tax.

How do I find the state-by-state breakdown for my muni fund?

Check your brokerage’s tax center, usually under “supplemental tax information” or “state tax information.” Fund companies like Vanguard, Fidelity, and Schwab publish these breakdowns in February. The document shows what percentage of tax-exempt interest came from each state. Multiply your total tax-exempt interest by the non-NY percentage to get your Line 20 amount.

I moved to New York last year. Do I owe NY tax on my old state’s muni bonds?

For the portion of the year you were a NY resident, yes. If you moved to NY on July 1, you’d generally add the out-of-state muni interest earned from July 1 through December 31. Part-year residents file IT-203 instead of IT-201, but the concept is the same — out-of-state muni interest during your NY residency period is taxable.

Are Puerto Rico bonds exempt from NY tax?

Yes. Under federal law (48 U.S.C. § 745), bonds issued by U.S. territories (Puerto Rico, Virgin Islands, Guam, American Samoa) are exempt from state and local taxes in all 50 states. So Puerto Rico muni interest doesn’t get added on Line 20. This makes PR bonds one of the few true “triple-tax-free” investments — exempt from federal, state, and local taxes regardless of where you live.

Should I switch to a NY-specific muni fund?

It depends on the math. NY-specific muni funds (like Vanguard VNYTX) hold only NY-issued bonds, so 100% of the interest stays exempt on your NY return. But they typically yield slightly less than national muni funds because demand from NY residents pushes prices up. If your combined NY/NYC marginal rate is above 10%, the tax savings from a NY-specific fund usually outweigh the lower yield. Run both scenarios before switching.

Need Help With Your IT-201?

Out-of-state bond interest, mutual fund breakdowns, and the transplant trap — we sort through it so you don’t overpay or underreport.

Get in Touch

← IT-201 Line by Line New York Tax Resources →