Hi @skybrian I think I've reverse engineered what's happening here. Does your 1099-INT also include "bond premium paid on tax-exempt bonds" (box 13 in 2021 forms)? Or, did you enter an adjustment to the tax-exempt interest for something like accrued interest paid on those bonds?
Long story but hopefully this helps. I was similarly confused when Turbotax says it has transferred a seemingly-random amount of "tax exempt interest from CA sources" to my CA return. It claims it transferred this from Schedule B, but there's no matching number anywhere on Schedule B, and switching into Forms mode doesn't really show where that number came from.
It seems the "transferred" number includes pro-rated amounts for adjustments made on the federal forms. Seems to be computed as:
[Federal tax-exempt interest from CA bonds] - [(Percentage of interest that's from CA bonds) * [Adjustments entered for bond premiums and accrued interest])
Plus a similar computation for tax-exempt dividends reported on 1099-DIV.
For the purpose of this example I zero'd out any dividends and focused just on tax-exempt interest. My situation:
- $15,575 total federally tax-exempt interest reported on 1099-INT from a bunch of municipal fonds
- $11,250 of that interest was from CA municipal bonds
- I broke this out in the TT interview details for the 1099
- Thus, the ratio of CA-exempt interest is 11250/15575 =72.23%
- $11,754 was reported on this 1099-INT for premium paid on tax-exempt bonds.
- $434 manually added by me as an adjustment for accrued interest paid on my bonds at time of purchase
TurboTax transfers to my CA form: $11,250 - 0.7223 * ($11,754 + $434) = $2447 of "tax exempt interest from CA sources".
I also have some "Exempt-interest dividends" from bond funds, reported on a different 1099-DIV in Box11. But since it's kinda a pain to figure out what % of each of those funds are specifically from CA bonds -- and in general, it's 5% or less -- I just declare those to be from "multiple states" and let CA take their extra $40 or whatever it ends up being.
Net: I think TT is doing the right/intuitive thing to pro-rate adjustments and save me a bit on CA taxes by taking those bond premium and accrued interest costs. But since they obfuscate this calculation it's just not clear from the forms what they are doing. It could probably be more precise if I split separate 1099s for CA and non-CA bonds, separating out how much premium and accrued interest mapped to which states.
But I've got a day job and CA has enough of my money.
