Most taxpayers know that interest from U.S. Treasury securities is taxable on the federal return. What many do not realize is that this income is generally exempt from state and local income tax.

The exemption can apply to:

• Interest received directly from Treasury bills, notes, and bonds.

• The portion of a mutual fund or money market fund dividend attributable to qualifying U.S. government obligations.

That second category is where the deduction most often gets missed.

When you’re a physician, consultant, or small business owner with income that crosses state lines, the rules start to feel like an interstate turf war.

Each state wants its cut — and unfortunately, they’re not always good at sharing.

For most taxpayers, the largest tax obligation they pay at the state/local level is their state income tax.