1099 INT accrued interest not flowing to state return correctly

[tktt]

I have a 1099-INT with both box 1 (total interest not including box 3) and box 3 (interest on US savings bonds and treasury obligations) interest amounts. I paid accrued interest on some treasury notes/bonds and entered that at the bottom of the TurboTax 1099 form under adjustments to interest, marking the box for "accrued interest". It subtracted correctly on my schedule B generating the special notated line for accrued interest.

My issue is when the box 3 interest flows through to my state taxes as a deduction, that TT is prorating the accrued interest between Box 1 and Box 3 interest. The accrued interest should be reducing my tax deduction at the state level as it all was caused by the government bonds. How do I tell Turbotax that the accrued interest relates only to the Box 3 interest income and none of it to Box 1 interest? (Without fixing this, I would be taking too much deduction on my state taxes for interest on treasury obligations.)

Thanks

[leviton11]

I am having the same issue.  The funny thing is most of my accrued interest paid was on treasury securities and the proration is causing my basis in box 1 to drop which is understating my income.  I would love to let this go and not pay the taxes, but do not want to risk it.

Hopefully someone will have a solution.

[tktt]

I found several older posts of similar issues and they were advised to split their 1099-INT forms. In my case that would be one 1099 form in Turbotax with my Box 1 interest, and a separate one for the same institution with my box 3 interest along with the accrued interest that goes along with it.

I think that may be a better idea than just subtracting the accrued interest from the interest myself, as it will keep the accrued interest line on my schedule B along with interest amounts that can be matched to the various boxes on the 1099s.

These are the other links I saw:

https://ttlc.intuit.com/community/state-taxes/discussion/interest-income-exempt-in-nj/00/2230450
https://ttlc.intuit.com/community/taxes/discussion/accrued-interest-paid-when-purchase-bonds-is-not-...
https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/tax-exempt-bonds-more...

[richlux]

I have the same issue except the opposite scenario. My accrued interest is part of Box 1 because it's from Agency Bonds (Federal Farm Credit Banks) that are exempt from State and Local tax.  If I don't enter the accrued interest, TT properly carries the entire Box 3 amount to my State taxes (MD) as a deduction.  However, if I enter the accrued interest, TT puts a lower, prorated amount of Box 3 into my State taxes.  This is clearly not correct because all of Box 3 should flow to the State since my accrued interest is part of Box 1.  This might not be "bug" per se, but TT should ask the user where the accrued interest comes from instead of  just prorating it, so it knows how to properly handle the deduction for State taxes.

I think that overriding this number in the State form is probably a better solution than creating separate 1099-INT entries since the TT number is actually wrong.  Also, having two 1099-INT entries won't match exactly what the IRS gets.

Rich

[isamom1982]

@richlux @- HOW do you recommend to adjust for accrued interest in the STATE tax inputs for Turbotax desktop  (Home and Business) version, though?  I cannot find any adjustment option that seems to fit logically in the program.

I think I agree with you that an adjustment to accrued interest on Municipal bonds is likley easier (and less prone to trigger and inquiry) if done on the State Return - rather than by splitting the 1099INTs obtained by brokers into interest types and then entering hem in the Federal Return input (as 1099INT sums might not match with what was reported to the IRS - even cumulatively by rounding...)

@tktt @leviton11 - any suggestions/insights?

[richlux]

It's not actually an adjustment. You just need to go into forms mode and override the number with the correct value.

Rich