Why is TurboTax reporting I-Series Bond interest on my MN state return? As I understand it, Treasury I-Series Bond interest is exempt from state tax.

[mikemuske]

I filled out all federal and state questions in TurboTax and got to the point of filing the return, but the MN Tax Due is still higher than it should be due to the I-Series bond interest. When I go back to the Federal Taxes tab, to Wages & Income, and edit the Interest on 1099-INT section, if I edit the amount for the Treasury Direct bond interest (box 3), I can see the MN Tax Due change.

It appears to be adding 1% of the bond interest in box 3 to my MN State taxes. How can I fix this?

[mikemuske]

I saved my return as a PDF and confirmed the I-Series bond interest is listed on Schedule B (Form 1040) of my MN return under the Part I Interest section in box 1. There is no amount in box 3, which is "Excludable interest on series EE and I U.S. savings bonds issued after 1989." This appears to be a software bug. Is there a manual workaround?

[VolvoGirl]

Go back and confirm you entered the 1099INT with the amount in box 3 not box 1.  Try deleting the 1099INT and enter it again manually.  That usually clears something out and fixes it.  

[mikemuske]

Thank you for taking a look, unfortunately I verified the amount is in Box 3 already.  I also tried deleting the 1099-INT entry just now and recreating it, but it had the same effect.

Upon deleting the entry my MN Tax Due decreased, and after I re-created it at put the interest in Box 3 (checking My form has info in more than just box 1), my MN Tax Due increased again.  Just to be clear, I have no value in Box 1.

[VolvoGirl]

I did a search and found this answer from last year.  Maybe it will help?

https://ttlc.intuit.com/community/state-taxes/discussion/mn-savings-bond-interest-2023/00/2972607 

[mikemuske]

In that link they are saying to enter the amount from box 3 on the 1099-INT into box 8. I tried this but it had no effect. Also, I don't feel comfortable putting the amount from box 3 into box 8 because it doesn't show up that way on the form from the U.S. Treasury.

[AmyC]

I think you are fiddling with the federal income and it is affecting some state calculation since you said you can see the interest is clearly excluded. Only you can see your tax forms. If the forms are correct and carrying everything through correctly, you are in good shape. If not, find the error. Changing federal numbers changes a lot of things as there are many moving parts. You are hung up on it being the tax exempt income when it is probably just the change in income affecting several potential things.

 MN starts with the federal AGI and moves numbers about to get to MN.

[mikemuske]

Thank you Amy, I did figure it out tonight and you are right that it was due to AGI being higher on line 1 of MN form M1 due to reporting the bond interest.  As a result, my MN standard deduction was reduced more, since my income exceeds a certain threshold.  So I think TurboTax is doing it right... but it feels like MN is doing it wrong...  If the bond interest isn't supposed to be taxed by the state, then my state taxes shouldn't go up due to reporting US bond interest 🙄

I wonder if I should have reduced my AGI by the bond interest amount and not do the subtraction on MN? Pretend the interest never happened for MN purposes...