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baldietax · ‎March 21, 2025

just to check, which GSEs are you referring to as GNMA/Fannie/Freddie are not generally state exempt; per Vanguard footnote on 1099-DIV US Gov Obligations which applies here also - "Investments in U.S. government obligations may include the following: Federal Farm Credit Banks, Federal Home Loan Banks, the Student Loan Marketing Association, the Tennessee Valley Authority, the U.S. Treasury Department (bonds, notes, bills, certificates, and savings bonds), and certain other U.S. government obligations. GNMA, FNMA, Freddie Mac, repurchase agreements (including those that involve U.S. government obligations), and certain other securities are generally subject to state and local taxes."

if your bonds are state exempt but your broker has reported them in Box 1 instead of Box 3, I think you have two options:

1. Update the 1099-INT to move this interest from Box 1 to Box 3 (or input as a separate 1099 etc). Box 3 should flow thru to your state return as a subtraction to income (but you should verify). Not sure any IRS implications but I assume Box 1/3 adjustments do happen, and do not affect Fed taxes.

2. Put the subtraction into your state tax as a miscellaneous/additional subtraction, most state programs should have this ability, and place for an explanation for the subtraction. I've seen some comments in the forum that some states preclude e-file if you put in these type of adjustments but don't recall which ones.

Not a CPA/Expert so I can't advise and this is just my 2 cents, but personally I would just fix the 1099-INT in this case, it doesn't affect Fed taxes and is cleaner for state.

If you have any issues with the imported 1099 just delete it and input manually, they do not take long to input. Also note if you hold individual bonds and have adjustment due to accrued interest paid for purchases on the 1099 then you need to split the 1099 up into separate Box 1/3/8 because TT has no way to specify which box(es) to allocate the accrued to.