I just read a disturbing section in Michael Gray's tax letter that I received today (Oct 4 '24).
It appears that CA still wants to tax any interest that is not paid directly by the treasury!
Below is the quote. [removed]
FTB says Accrued U.S. Treasury bond market discount interest is subject to California tax.
In response to an inquiry by Spidell Publishing, the California Franchise Tax Board said accrued U.S. Treasury bond market discount interest is subject to California tax. The market discount interest isn’t paid by the U.S. Treasury, so it isn’t eligible for an exclusion. It is taxable as ordinary interest income. The income does not represent tax-exempt interest earned on a federal obligation.
(Spidell’s California Taxletter, October 2024, p. 11, "California treatment of U.S. Treasury bond accrued discount income.")
