tax exempt bonds more than one state with accrued interest

[jwbonds]

How does one enter and have applied correctly in TurboTax the accrued interest deduction which needs to be split to more than one state. Specifically, I have tax exempt bonds issued in Illinois and New York purchased last year (2022) that have accrued interest. New York taxes the IL interest so that accrued interest has to be deducted from the gross amount. TT seems to only enter and use the total accrued interest from my purchases, not a state specific amount so it appears my state return is incorrect. Perhaps they do some per centage, but it isn't precise and is inaccurate. Thank you.

[SteamTrain]

@jwbonds 

.....If you are filing a tax return for either of those states, then, in the software, you would need to break out the box 8,9, and 13 values for the state you are filing a tax return for...and report it in its own 1099-INT (from the same broker.)

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Furthermore, when you have any accrued interest to report (subtract) for what you paid the seller of a Muni bond you bought in 2022.....and if there are box 1 or box 3 $$ on the same 1099-INT, then all of the box 8,9 & 13 $$ must be removed and reported on a separate 1099-INT form(s).

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Example:  As a NY resident

Say I have a 1099-INT from an account at Schwab, that contains $$ in boxes 1, 8, 11 &13.

Box 8 & 13 represent income from various state Muni bonds bought over the years, but also an IL bond I bought in 2022 with accrued interest, and a NY bond with accrued interest bought in 2022.

I would need to create 3 different 1099-INT forms for my tax return

1)  One with only the box 1 & 11 $$

2) Another with the box 8 & 13 $$ from the NY purchased bond...& then it's accrued interest.

3) Another with any remaining box 8 & 13 $$...and the accrued interest for the IL bond (note...I'm not filing in IL, so the IL $$ can be mixed in with the other Munis I might hold.)

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There really isn't any other clear way to do this , other than to create separate 1099-INT forms (in the software).

And the point I made about removing the Muni $$ from the combined 1099-INT when there are box 1 $$ in it? That also applies if there are box 3$ on it.....the issue there is that the Accrued interest that you paid the seller of the bond?  That gets applied proportionately to the box 1, 3 & 8 values if all is left on the same 1099-INT.   A really subtle complication that gets past many folks.

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Buy a Corporate bond with accrued interest paid the seller?  Same thing.. put all the box 1 & 11 $ on it's own 1099-INT before entering the accrued interest for that bond on that new 1099-INT.

Buy a Treasury bond with accrued interest paid the seller?  Same thing.. put all the box 3 & 12 $ on it's own 1099-INT before entering the accrued interest for that bond on that new 1099-INT.

[jwbonds]

Thank you for your information. I have to say though that this is a pretty big deficiency in the Turbotax product. There must be plenty of people with this problem, and this labored solution all put on the user. They could easily ask for the accrued interest by state at the time they ask for the state split on tax exempt interest, and apply that to the state return, just as they do the interest. As it is now, the software creates an error (by creating its own proportional application of the accrued value) that someone could easily overlook. Bad programming for sure. Thanks again for your help.

[SteamTrain]

Dealing with the box 1, box 3, and box 8 $$ on one form, if accrued interest is to be declared for one or more of those...that could easily be remedied by having three different accrued interest entries on the follow-up page.

The state split situation (for accrued interest on your own state's Muni bonds, vs accrued interest on any other state's) would be much harder to program.....but agree it's not insurmountable.  I can also see that doing so, in this situation, would likely confuse Far more people than it would help.

[jwbonds]

Hello again, Admittedly, being retired a couple of years, my programming skills are a bit rusty, but this doesn't seem a big trick at all to get right. The program already asks for the state split on interest, just add a field in another question to add the state split on accrued interest (if any), and then calc and move the numbers to the state filing. It hardly seems likely to be confusing to users (with this activity), as anyone who knew to split out the interest by state should also figure out the need to split the accrued interest by state when prompted. However, even if it were to be complex, lots of tax code is complex. I think that is a prime motivation for people to buy software such as Turbotax especially one that touts it's 100% accuracy standard. As it is written now, the program produces an incorrect state tax submission for the fact pattern in question, which I hope isn't the performance standard Turbotax aspires to. Having to undo the Fidelity produced and downloaded information and manually produce additional 1099-DIVs is an aberration in how most users would expect the software to perform. It's hard for me to believe Turbotax wouldn't be inclined to fix a part of the program that produces errors based on the program's incorrect apportioning of the accrued interest to the state returns. I guess we will find out now that the issue is documented here. Thanks.

[jwbonds]

should say 1099-INTs, not 1099-DIVs.