Generally, yes, if the interest came from bonds issued by another state or local government outside Oklahoma.
For Oklahoma, tax-exempt municipal bond interest that is excluded from federal income may still be taxable on your Oklahoma return and must be added back to income. This addition is reported on Schedule 511-B, Line B1 for residents and Schedule 511-NR-A, Line A1 for nonresidents/part-year residents.
Interest You Do Not Add Back
The following interest is generally exempt from Oklahoma income tax:
- Bonds issued by the State of Oklahoma
- Oklahoma Capital Improvement Authority
- Oklahoma Municipal Power Authority
- Oklahoma Student Loan Authority
- Oklahoma Transportation Authority (formerly Turnpike Authority)
- Most Oklahoma local governmental obligations issued after July 1, 2001 (with limited exceptions)
Interest You Do Add Back
You must add the interest to your Oklahoma return if it was:
- Tax-exempt federally, and
- Issued by another state or a political subdivision of another state (non-Oklahoma municipal bonds).
If the Interest Came From a Mutual Fund
If your municipal bond income came through a mutual fund, Oklahoma requires documentation showing the percentage of the fund's income that came from obligations exempt from Oklahoma tax. Only the exempt Oklahoma portion may be excluded.
Documentation Required
Oklahoma instructs taxpayers to provide:
- A schedule listing all municipal interest received by source and amount.
- Mutual fund documentation, when applicable.
Common Tax Software Rule
For most taxpayers:
- Oklahoma municipal bond interest → Do not add back
- Municipal bond interest from any other state → Add back to Oklahoma income
Example:
If your Form 1099-DIV reports $500 of tax-exempt interest from a Texas municipal bond fund and none of that interest is attributable to Oklahoma obligations, the $500 would generally be added to your Oklahoma return. Conversely, $500 of interest from qualifying Oklahoma municipal bonds would remain exempt.