There appears to be an error in the way U.S. Government Interest (from Series EE Savings Bonds) is treated in the TurboTax Virginia income tax calculations. U.S. Government Interest income should be EXCLUDED from VA taxable income.
The VA 760 Form starts with the taxpayer's AGI on the federal tax return. Note that the federal AGI INCLUDES U.S. Government Interest. However, if I examine the "Sch ADJ" form in TurboTax's VA income tax calculations, I see that U.S. Government Interest is first treated as an ADDITION to income (in line 2b of the "Schedule ADJ/CG"). Beside line 2b, TurboTax assigns a code to this addition. In my current tax return calculations, the TurboTax-assigned code is "10". According to the VA income tax website, this code indicates the income is "Interest on obligations of other states". This is obviously an error, because that exact amount of interest was earlier identified as U.S. Government Interest. (My income from "obligations of other states" was far lower than my U.S. Government Interest last year.)
In the "Subtractions" section of Schedule ADJ/CG, my U.S. Government Interest once again appears (correctly) on Line 4, which is labeled "Income (U.S. obligations/securities)". The effect is to subtract U.S. Government Interest from the running total.
Note that the effect of first the Addition and then the Subtraction of U.S. Government Interest to the federal AGI is to leave the federal AGI unchanged. In essence, U.S. Government Interest remains included and fully taxed by the TurboTax code. Under Virginia law, U.S. Government Interest should be treated as tax free.
This problem should be fixed. Otherwise, Virginia taxpayers will find themselves paying state income taxes on U.S. Government Interest, even though that interest income ought to be EXCLUDED from income that is taxable in Virginia.
