Most distributions from the VanEck High Yield Muni ETF (HYD) are exempt from federal income tax, but the state tax information that matters for your return comes down to one document: VanEck’s annual state-by-state breakdown, which tells you what percentage of the fund’s tax-exempt interest came from bonds issued in your state. Only that slice, plus anything attributable to U.S. territories, escapes your state income tax. The rest is taxable on your state return like ordinary interest.
What HYD Actually Pays Out
HYD’s distributions fall into two buckets on your Form 1099-DIV. Exempt-interest dividends, reported in Box 12, come from interest on the municipal bonds the fund holds and are excluded from federal gross income under Section 103 of the Internal Revenue Code.1Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds Capital gains dividends, reported in Box 2a, come from the fund selling bonds at a profit and are fully taxable at the federal level.2Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions
The state-tax question applies only to Box 12. Capital gains from HYD are taxable at both levels and flow through to your state return automatically.
The Home-State Rule
Most states that levy an income tax exempt municipal bond interest only if the bond was issued within that state. Interest from an out-of-state issuer is taxed on your state return the same as ordinary income.3Municipal Securities Rulemaking Board. Municipal Bond Basics HYD is a national fund with holdings from issuers across many states, so the portion that qualifies for your home-state exemption is usually a small percentage of your total exempt-interest dividends.
Territory Bonds Are Exempt Everywhere
Bonds from U.S. territories are a separate category. Puerto Rico bonds are exempt from federal, state, and local tax regardless of where you live, a treatment set by federal statute.4Office of the Law Revision Counsel. 48 USC 745 – Tax Exempt Bonds Bonds from Guam, the U.S. Virgin Islands, and American Samoa get similar treatment because Section 103 defines “State” to include U.S. possessions.1Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds Whatever percentage VanEck attributes to territories in its breakdown counts as state-exempt income for every HYD shareholder.
If Your State Has No Income Tax
Residents of Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no state income tax on this income and can ignore the state-by-state math entirely. New Hampshire has no general income tax. Washington taxes only certain capital gains above a high threshold, not bond interest.
Calculating Your State-Exempt Amount
You need two documents to do this calculation: your Form 1099-DIV and VanEck’s supplemental tax guide, published each year on its tax information page.5VanEck. ETF Tax Information The guide lists HYD alongside a percentage for every state and territory, showing what share of the fund’s tax-exempt interest came from each jurisdiction in the prior tax year.6VanEck. 2025 VanEck Supplemental Tax Guide
The math is simple. Take the exempt-interest dividend amount from Box 12 of your 1099-DIV. Multiply it by the percentage VanEck lists for your home state, then add any territory percentage. That total is your state-exempt amount. The remainder is taxable on your state return.
Say your 1099-DIV shows $2,000 in Box 12. VanEck’s breakdown attributes 6 percent of HYD’s exempt interest to your state and 4 percent to Puerto Rico. Your state-exempt portion is $2,000 × 10 percent, or $200. The other $1,800 is state-taxable.
Entering the Adjustment on Your Return
Tax software handles this in the state portion of the return, usually under a municipal bond interest adjustment. The program will ask for the amount of tax-exempt interest that is not taxable by your state. Enter the figure you calculated. Skip this step and the software has no way to know where the underlying bonds were issued; depending on the default, it will either exempt all of your interest (incorrect) or none of it (also incorrect).
Some programs accept a percentage instead of a dollar figure. Either way, confirm you’re starting from Box 12, not Box 1a. Using the total distribution figure as your base is a common error and throws off the entire calculation.
Watch for the AMT Piece
High-yield muni funds hold more private activity bonds than plain-vanilla muni funds, and interest on those bonds is a tax preference item for the Alternative Minimum Tax. Section 57(a)(5) folds interest on specified private activity bonds issued after August 7, 1986, into the AMT calculation even though it’s exempt for regular tax.7Bloomberg Tax. Internal Revenue Code 57 – Items of Tax Preference
According to VanEck’s most recent supplemental tax guide, roughly 23.62 percent of HYD’s exempt interest was classified as subject to AMT.6VanEck. 2025 VanEck Supplemental Tax Guide That share shifts year to year with the fund’s holdings. The AMT-subject amount is broken out on your 1099-DIV in Box 13, and tax software carries it into the AMT worksheet automatically.
Whether this costs you anything depends on whether you owe AMT at all. For 2026, the AMT exemption amounts are:
- Married filing jointly: $140,200, with the phaseout beginning at $1,000,000 of AMT income
- Single filers: $90,100, with the phaseout beginning at $500,000
- Married filing separately: $70,100, with the phaseout beginning at $500,000
Those exemptions are high enough that most taxpayers never trigger AMT.8Internal Revenue Service. Revenue Procedure 2025-32 If your income falls into the phaseout range, the AMT-subject share of HYD’s interest is worth checking.
The 3.8% Net Investment Income Tax
The Net Investment Income Tax does not apply to tax-exempt muni interest. Income already exempt for regular tax purposes is excluded from NIIT, and HYD’s Box 12 dividends fall in that category.9Internal Revenue Service. Topic No. 559, Net Investment Income Tax So even if your modified adjusted gross income clears the $200,000 single or $250,000 joint threshold, your HYD exempt-interest dividends don’t add to the NIIT base. Capital gains distributions from the fund do count.
Keep the Paperwork
Hold on to your 1099-DIV and VanEck’s state-by-state breakdown for at least three years after you file the return that used them. The IRS general statute of limitations for assessing more tax is three years from filing, stretching to six years if you omit more than 25 percent of your gross income.10Internal Revenue Service. How Long Should I Keep Records State audit periods often mirror the federal timeline but can run longer. If a state auditor asks how you arrived at the exemption figure, the VanEck supplement is your answer.