California does not provide reduced tax rates for dividends. Generally, there is no difference between the amount of dividend income reported for federal purposes and the amount reported using California law.

California taxes interest derived from obligations of other states and their municipalities, but interest from U.S. obligations and California obligations is not taxed by California. When a mutual fund holds state and municipal bonds, the interest income from these obligations that the fund passes through to the shareholders is considered dividend income that is termed an "exempt-interest dividend" and is not taxable for federal purposes. If the mutual fund has at least 50% of its assets invested in tax-exempt U.S. obligations and/or in California obligations or those of its municipalities, that portion of the dividend derived from tax-exempt U.S. obligations and/or California or its municipalities’ obligations is exempt from California income. If the exempt percentage is less than 50%, the entire amount is taxable. (R&TC Sec 17145)

A lawsuit was filed in July 2016 in the Los Angeles Superior Court challenging the California law discussed above that U.S. obligations and California muni-interest is taxable to California where the interest is passed through from mutual funds and the mutual fund is invested less than 50% in the tax-exempt bonds. (Ronald & Pamela Mass v. FTB (July 2016) Case #BC627648, Los Angeles Superior Court) The tax amount in dispute on the taxpayer’s 2010 return is $7,384. After hearing the case in September 2017, on October 30, 2017, the court issued judgment in favor of FTB, holding that the Legislature's enactment of Revenue and Taxation Code section 17145 was appropriate and does not violate Article XIII section 26(b) of the California Constitution.

The taxpayers appealed, but in August 2019 the Court of Appeal’s ruling confirmed the lower court’s decision. The taxpayers appealed to the California Supreme Court, but on November 20, 2019, their petition for review by the high court was denied. (https://www.ftb.ca.gov/tax-pros/law/litigation-roster.html)

Generally, California only treats as tax-exempt interest from California state bonds or municipal bonds issued by a county, city, town, or other local government unit within California. Therefore, interest from the following obligations that are tax-exempt for federal purposes are fully taxable in California: