US bond interest on schedule K-1(1041) federal and state forms deducted twice from state income

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I have interest from US bonds on a schedule K-1 (1041) federal and K-1 (1041) state tax form. When I enter the interest income from my federal K1 form on my federal tax, TurboTax easy step has a line for "US Bonds (Nontaxable to States) Included in box 1." When I enter the amount there, it is automatically included on my TurboTax state form under "Modifications Decreasing Federal AGI" as income from obligations of the US Government. My state tax is lowered as a result of this entry.

My state K1 form indicates the same amount as a negative "fiduciary adjustment." TurboTax state has a box to check for "fiduciary adjustment (loss) as a beneficiary of an estate or trust," and then prompts for the amount. When I enter the amount there, TurboTax enters the same amount under the fiduciary adjustment of "Modifications Decreasing Federal AGI" and my state tax is lowered as the same interest is again deducted from my income.

What is the correct way to enter this US bond interest without it getting deducted from state income twice, but still demonstrating that the amounts from the K1 forms are accurately included in both my federal and state tax forms?

Anonymous_Answer

Level 15

I am using TurboTax Business. I entered US Treasury Int (Box 3) in TurboTax step by step. However, the K-1 does not state US Treasury Int anywhere including Box 14 Other Information. None of the Box 14 codes state US Treasury Int. I can't believe the tax preparer needs to separately provide this information to a beneficiary.

@TD2023 wrote:

I can't believe the tax preparer needs to separately provide this information to a beneficiary.

It is entirely logical since interest from US Treasury obligations is federal taxable.

The interest is only exempt from state taxation and, (a) some states do not levy a state income tax whatsoever, and (b) the total income (including Treasury interest) on some K-1s may not even meet the state threshold for having to file a state return for states that tax individual income.

Regardless, the Treasury interest would, in virtually all cases, be reported on a state iteration of a K-1 (not some separate statement) and reported as such by the beneficiary. An example (for Illinois) is depicted below.