Missouri taxes interest on municipal bonds based on who issued them. Interest on bonds from the State of Missouri or any of its political subdivisions is exempt from Missouri income tax. Interest on municipal bonds issued by other states is not: Missouri requires you to add it back to your state adjusted gross income, even though it stays exempt on your federal return. The rule lives in Section 143.121 of the Missouri Revised Statutes.1Missouri Revisor of Statutes. Missouri Code 143.121 – Missouri Adjusted Gross Income
Missouri-Issued Bonds Are Fully Exempt
Bonds issued by the State of Missouri or any of its political subdivisions — counties, cities, school districts, and special taxing districts — produce interest that is exempt from Missouri income tax. Section 143.121(2)(2) generally requires taxpayers to add back tax-exempt municipal bond interest when converting federal AGI to Missouri AGI, but it carves out an explicit exception for obligations of Missouri and its subdivisions.1Missouri Revisor of Statutes. Missouri Code 143.121 – Missouri Adjusted Gross Income
Because this same interest is already excluded from federal gross income under Internal Revenue Code Section 103, Missouri-source municipal bond interest escapes both federal and state income tax. You don’t report it as taxable income on your Missouri return, and it never enters your Form MO-A calculation. The full yield stays with you.
Out-of-State Municipal Bond Interest Gets Added Back
Interest from bonds issued by another state or its political subdivisions is federally tax-exempt but not exempt in Missouri. Section 143.121(2)(2) directs taxpayers to add back interest on governmental obligations excluded from federal gross income, with exceptions only for Missouri-source bonds and U.S. government obligations.1Missouri Revisor of Statutes. Missouri Code 143.121 – Missouri Adjusted Gross Income
With Missouri’s top individual income tax rate at 4.70% for 2026, the add-back has real cost.2Missouri Department of Revenue. 2026 Missouri Withholding Tax Formula A taxpayer with $10,000 of out-of-state municipal bond interest could owe up to $470 in Missouri tax on income that looks tax-free on the 1099-INT. This is one of the most common filing mistakes: people see “tax-exempt interest” on the federal form and assume the exemption carries through to the state return.
There is a narrow offset. If you incurred deductible expenses tied to earning that out-of-state interest, such as investment advisory fees allocable to those bonds, and those expenses total at least $500, Missouri lets you reduce the add-back by those expenses.1Missouri Revisor of Statutes. Missouri Code 143.121 – Missouri Adjusted Gross Income Most individual investors won’t reach that floor.
U.S. Treasury and Territory Bonds
Federal law bars states from taxing interest on U.S. government obligations. Under 31 U.S.C. § 3124, stocks and obligations of the federal government are exempt from state taxation.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation That covers Treasury bills, notes, and bonds, along with Series EE and Series I savings bonds.
Interest from these instruments is included in your federal AGI, so Missouri gives you a subtraction to take it back out. Section 143.121(3)(1) provides a subtraction for interest or dividends on obligations of the United States, its territories and possessions, and any federal authority, commission, or instrumentality, to the extent federal law exempts them from state tax.1Missouri Revisor of Statutes. Missouri Code 143.121 – Missouri Adjusted Gross Income
Bonds issued by U.S. territories qualify as well. The Missouri Department of Revenue specifically identifies Puerto Rican, Guam, American Samoa, Northern Mariana, and Virgin Islands bonds as exempt, along with Federal Home Loan Bank bonds, Farm Credit Act obligations, and other federally authorized instruments.4Missouri Department of Revenue. Exempt United States Government Obligations
The same $500 expense floor applies in reverse here. If you borrowed money to buy these federal obligations or had expenses producing the interest, and those expenses total at least $500, you must reduce your subtraction by that amount.1Missouri Revisor of Statutes. Missouri Code 143.121 – Missouri Adjusted Gross Income
Bond Funds That Hold Bonds From Many States
If you own shares of a municipal bond mutual fund or ETF rather than individual bonds, you have a sorting problem. The portion of the fund’s distributions attributable to Missouri-source bonds stays exempt. Everything else must be added back.
Your fund company’s year-end tax statement typically breaks down tax-exempt interest by state of issuance. Multiply the total tax-exempt distribution by the Missouri percentage to find your exempt portion; the rest goes on Line 1 of Form MO-A as out-of-state interest. If the fund doesn’t give you a state breakdown, the safe approach is to treat the entire distribution as out-of-state. A Missouri-specific municipal bond fund avoids the problem since every underlying bond should qualify for the exemption.
Capital Gains on Municipal Bonds Are Taxable
The exemption covers interest only. If you sell a municipal bond for more than you paid, the gain is fully taxable on both federal and Missouri returns, even when the issuer is a Missouri entity. Capital gain distributions from a municipal bond fund work the same way: taxable at both levels regardless of what the fund holds.
Original issue discount bonds complicate the picture because part of what looks like a gain at maturity may actually be treated as interest income rather than capital gain. If you bought below face value, review your broker’s cost-basis reporting carefully or consult a tax professional.
Reporting It on Form MO-A
Three documents are involved: federal Form 1099-INT, Missouri Form MO-A (Individual Income Tax Adjustments), and Missouri Form MO-1040.
Box 8 of your 1099-INT reports total tax-exempt interest for the year.5Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID That one number combines Missouri bonds, out-of-state bonds, and any territory bonds. Use your brokerage statements or the fund’s supplemental tax information to split it by source.
On Form MO-A, enter out-of-state municipal bond interest on Line 1, “Interest on state and local obligations other than Missouri source.” This increases your Missouri AGI. Enter U.S. government obligation interest that was included in your federal AGI on Line 8, “Interest from exempt federal obligations included in federal adjusted gross income.”6Missouri Department of Revenue. Form MO-A – 2025 Individual Income Tax Adjustments Attach a detailed breakdown or copies of your 1099 forms as supporting documentation.
Missouri-source bond interest doesn’t appear anywhere on Form MO-A. It was already excluded federally and Missouri doesn’t add it back, so it never enters the calculation. The completed MO-A flows into your MO-1040, filed either through Missouri’s online portal or by mail to Jefferson City.7Missouri Department of Revenue. Form MO-1040 – 2025 Individual Income Tax Return
Effect on the Missouri Property Tax Credit
Missouri offers a property tax credit for certain seniors and individuals with disabilities. Eligibility depends on total household income, which includes nontaxable income.8Missouri Department of Revenue. Property Tax Credit Tax-exempt municipal bond interest counts toward that total whether it came from a Missouri bond or an out-of-state bond.
If you’re near the income threshold, a sizeable bond portfolio can push you over the limit even though none of that interest shows as taxable income on your regular return. Check the Property Tax Credit Qualification Chart before assuming your bond income is invisible for this purpose.
What Happens If You Report It Wrong
The most common error is forgetting to add out-of-state municipal bond interest on Line 1 of Form MO-A. The Department of Revenue matches 1099-INT data, so omissions tend to surface. You’ll owe the tax plus interest from the original due date; the interest rate adjusts periodically and can be checked through the Department’s online calculator.9Missouri Department of Revenue. 2026 Declaration of Estimated Tax for Individuals
The reverse mistake, forgetting to subtract U.S. government obligation interest on Line 8, doesn’t trigger a penalty but means you overpaid. You can file an amended MO-1040 to claim a refund within three years of the original filing deadline.