Does Turbotax fail to adjust state tax due on out-of-state municipal bond interest?

[icecreamemperor]

Municiple bonds are federal tax exempt, but out-of-state munis are subject to state tax. Turbotax software fails to make this adjustment.

[SteamTrain · Accepted solution]

It sometimes has bugs...

...But usually (not always) it is the user who has improperly indicated what states the exempt interest came from.

You need to Edit every 1099-INT that has box 8 interest in it, and every 1099-DIV that has box 10 dividends in it.

On one of the pages that follows the main for, it asks what state those tax-exempt $$ came FROM.  If you hold mutual funds, or a mixture of state's bonds, then you can answer "More than one state" and be done with it.  (some people accidentally select their home state here, and that is usually wrong)

BUT....if you want to break out the $$ received from your own state's bonds, you have to check a box on that same page, and then calculate yourself how many $$ came from your own state (or any US territories, like Guam or Puerto Rico)...the rest is just left as "More than one state".

Example:  You received $1000 of box 8 on a 1099-INT.  You live in NC and he broker indicates that 2% came from NC. SO you break out $20 for NC, and $980 for "more than one state".   That saved you $1 on your NC taxes Which taxes at 5% of the $20.

Whether it's worth the effort for you state depends on what your bond holdings are.  A couple states have minimums, like CA, which only allows you to do this for individual CA bonds you own, or Mutual fund collections that hold more than 50% of assets as CA bonds.

[SteamTrain]

@icecreamemperor

I attached a picture to help..

[icecreamemperor]

Thank you, that was a helpful response. However, it has been my practice to input financial data to Turbotax via direct download from my brokage firm. While the Fed tax on munis is accurate the state taxes are not correctly calculated. I suppose the only solution is for me to enter the state muni data by hand.

[SteamTrain]

The individual state information from the Munis is never downloaded into you file....the tax import files have never been set up that way.  (maybe someday they will but then EVERY brokerage and tax software provider would have to agree to the format...and I can see some major problems with attempting to do it too)

It's fairly simple to Edit the 1099-DIV and -INT forms and just step thru to the page I show in my picture.  Even after importing. IF you don't check the tiny box in my picture, you don't have to mess with the extra boxes...but the top selection MUST NOT be your home state for a mutual fund collection...it needs to be set to "More than one state"