I bought Trsy Notes at a discount. My Broker's 1099-B put the Accrued Mkt Discount on 1f, going to Sch B as interest income, but it is not subtracted on MI return. Fix?

Forum|Forum|1 year ago
January 31, 2025
13 replies
111 views

Interest income on Federal obligations are tax exempt in Michigan but TurboTax's MI return does not refect the deduction. What can I do to avoid State taxes on this interest income?

baldietax

Level 12

Been a hot topic - I've had the same issue in VA last year and expect the same this year - the only "fix" I'm aware of is to put this into your state taxes as a manual subtraction with explanation (there should be a screen for that).

Same topic recently for someone in NY:

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-new-york-tax/00/3441883

Larger thread thread on this topic:

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-trea[product key removed]-taxability/00/3091472

mikehullcpaAuthor

Level 2

Yes, I had the same problem last year and manually input the adjusted Federal Interest Income amount on the Michigan return. Although this corrected the Michigan return's tax calculation, the manual override of the number that normally transfers from the Federal return resulted in being unable to e-file the Michigan return even though the TurboTax review reflected NO Federal or Michigan errors.

I will review the other linked posts......thanks for your feedback. Is there a way to get TurboTax support staff to address this? I spoke an hour on the phone with my Broker (Morgan Stanley's E*Trade) yesterday, and that representative indicated their 1099 reporting looked right to him. In my case the interest income on T-bills was correctly shown on their 1099 as Federal government interest income on line 3 and accordingly TurboTax reflected this amount as a subtraction from my Michigan taxable income, but with respect to interest earned on the Treasury Notes (which have a longer maturity) it reflected differently....it went to the Capital Gains & Losses section, TT put the items on Schedule D, then "adjusted" the gain (interest) and moved the income to Schedule B as additional interest income but it is not classified as government interest income and accordingly is not being deducted on the MI return.

BTW, last year, because I could not efile due to the manual override, I printed the Michigan return and filed it by paper in the mail.

DetroitRick

Level 2

I've had the same problem, both in filing 2023 and 2024. Accrued market discount on Treasury notes - exclusion from Michigan income. My broker is reporting correctly as well. This year as last, I can't see any way to get TurboTax to handle this correctly, other than the same override that you mentioned (Michigan Schedule 1, Line 10). That is what I did last year. This will again preclude me from e-filing Michigan. I'm always on the lookout for a solution, but it's an old problem and I really don't expect TurboTax to ever address it.

DianeW777

Level 15

It depends. If you bought US Treasury notes at a discount in a secondary market, then the interest would not be reduced on your state return. If you purchased the bonds from the US government then you can deduct the interest on your state return.

Accrued market discount from a US Treasury obligation is not deductible on your state return if the effective paid interest is coming from a private party, not the US treasury. If you buy the bond from the government, you can subtract the interest. If you buy the bond from a 3rd party, the interest is not deductible.

@DetroitRick

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DetroitRick

Level 2

Sorry, but this is wrong. Accrued market discount is excludable from Michigan income. See Michigan Administrative Bulletin 2020-22. The fact that this discount is paid to a 3rd party vs. US Treasury is irrevelant under in Michigan tax law. Especially take note of this text from that bulletin: "Net losses on the sale or exchange of obligations of the United States government are added back to an individual’s AGI or a fiduciary’s FTI and gains are subtracted". Those losses and gains on SALE would NEVER be paid to US Treasury, only to the other party to the transaction. If gains are specifically excluded from Michigan income, AMD would follow. See also the section titled "Preemption of state tax under federal law"

Also, one might wonder, if accrued market discount is indeed not deductible when "paid to a 3rd party", why TurboTax allows exclusion from Michigan income of those dividends related to US Treasury instruments. These dividends are, for the most part, originating too from 3rd party transactions by the investing funds. Conceptually this is very similar.

Finally, tiring of all this discussion, spoke to a Michigan CPA in tax practice who also supported the subtraction. So......

Bottom line, I presume TurboTax will never fix this. I will continue to override the Michigan return to get the correct exclusion.

user17556408599

Level 2

In order to be able to efile, I "backdoored it" by entering a dummy 1099 called adjustment whereby I put in equal offsetting numbers in the amount of the discount with a negative number in regular interest and a positive in US Treasury interest. So for example, if there was a $1,000 discount, then -1000 in regular interest and +1000 in treasury. They show up as two lines on the Sch B worksheet but do not change the total. Then the correct amount carried over to the Michigan and I did not have to override. This enabled me to efile. I did this because I had had already paid the file fee prior to me finding out that it would not let me efile with an override. Return was accepted, so looks like it worked.