1099-B Proceeds for US Treasuries to avoid NJ state tax

[jman3]

One of the transactions on my 1099-B is for a US Treasuries redemption showing the dates acquired and redeemed, box 1d (proceeds), box 1e (cost, which is less than amount in 1d), and box 1f (accrued market interest, which equals 1d-1e). My understanding is that my state of NJ does not tax interest or gains on Treasuries, so do I need to do anything special when putting in this entry so that it is not taxed by NJ? My 1099-B also lists other stocks and bonds that would be taxed by NJ, so please let me know in case that also changes how I should put in the form so that only the US Treasury item is state exempt. Thanks!

[MarilynG1]

Treasury Bond interest accrues tax free. However, when you sell your bond (or bond fund), it is a fully taxable event.  

Capital Gains realized from selling a bond are subject to federal and state taxes. The short-term or long-term capital gain, or loss, on a bond sale, is the difference between the selling price of the bond and the original purchase price of the bond.

Here's more details and Guide to Investment Bonds and Taxes.

[jman3]

Just to confirm, it seems according to NJ that "Gains or losses realized from the sale or exchange of exempt obligations such as United States Treasury bonds are not taxable, nor are capital gains distributions from a qualified investment fund attributable to exempt obligations."

It also appears on NJ's Tax Topic Bulletin GIT-5 that capital gains from also suggests that US Treasuries are exempt for interest and capital gains in NJ (https://www.nj.gov/treasury/taxation/pdf/pubs/tgi-ee/git5.pdf).

So if that's the case, how should I input my 1099-B items relating to US Treasuries based on my initial question? Thanks!

[fanfare · Accepted solution]

to exclude such gains and/or interest income from NJ

you have to

1. enter the 1099-B/1099-INT
2. file federal tax return only
3. delete the 1099-B/1099-INT
4. file the NJ State return

@jman3 

[jman3]

Thanks @fanfare 

Just to confirm, since my 1099-B has several bonds and stocks entries besides this US Treasury transaction: after filing my federal return, I should just delete this one entry and keep all the other transactions listed in the same 1099-B form for filing the NJ return? 

[MonikaK1]

TurboTax will automatically identify the amount in Box 3 of Form 1099-iNT as an item to be subtracted from New Jersey income when you enter interest from U.S. Treasury securities in Box 3 of Form 1099-INT in the Federal interview. You can exclude interest and gains from Form 1099-B from Treasury securities in the New Jersey state interview, without removing the form from your Federal return.

When you complete the New Jersey state interview in TurboTax, you are asked a series of questions about any items that need to be treated differently or allocated among different states, (e.g., "My state (ME, MD, MA, NH, NJ, or WV) doesn't tax all of this interest" and you will see the Box 3 amount listed as a subtraction from New Jersey income. You don't have to do anything unless you need to allocate the subtraction amount among different states.

Typically, interest from corporate bonds will be in Box 1, interest from U.S. Treasuries will be in Box 3, and tax-exempt interest from muni bonds will be in Box 8. Even if you don't have to pay income tax on the interest, you still need to include it on your Federal tax return.

• Box 1 of the 1099-INT reports all taxable interest you receive, such as your earnings from a savings account.
• Box 2 reports interest penalties you were charged for withdrawing money from an account before the maturity date.
• Box 3 reports interest earned on U.S. savings bonds or Treasury notes, bills or bonds. Some of this may be tax-exempt.
• Box 4 reports any federal tax withheld on your interest income by the payer.
• Box 8 reports tax-exempt interest and relates to interest-bearing investments you hold with state and local governments, such as municipal bonds.

See this TurboTax tips article for more information.

If you have a 1099B with interest and gains from US Savings Bonds and T Bills, you can exclude them from New Jersey income in the New Jersey interview. When you get to the New Jersey state interview, you will see a screen, "Disposition of Property" that asks you to check the corresponding box in the Omit column to exclude the listed sale from New Jersey tax if it is nontaxable by that state (see screenshot):

Most investment income is taxable in New Jersey as interest, dividends, or capital gains. However, some interest income is exempt from tax, including: 

• Interest and gains from government debt obligations (such as bonds) of the State of New Jersey or its political subdivisions. These subdivisions can include municipalities, counties, school districts and authorities
• Interest and gains from debt obligations of the federal government, such as U.S. Savings Bonds and Treasury Bills

@jman3

[taxdavid667]

This replier doesn't understand the problem.  Capital gains on Treasury bonds reported on 1099-Bs get turned into accrued market discount interest on Schedule B.  The normal Turbotax mechanisms for excluding USG interest and capital gains from state tax don't work for this.  That is why the only method that works is to delete the transaction before filing the state return.  This is clearly a bug in TurboTax, how about fixing it?

[JKShaw]

I have the same issue with my state return currently taxing the 1099-B gain from a US Treasury Bill. I talked with a TT analyst for quite a while and made him aware of the issue. In my State, a subtraction for interst from a US Obligation is entered in one box. But this is a gain, so enter under Other subtractions. In the State screen that asks If You Have Any Items Not Taxed by (your state), check the Other box and enter there. Checking the box for Federally taxable exempt obligations did nothing for me and I believe this is a TT glitch. I asked the agent to pursue. 

[bill12215]

I have the same problem with Pennsylvania.  Even though I reported my T-Bill income in Box 3, the state side is showing this as taxable and on top of that indicates I need to pay a penalty to Pennsylvania for underpayment.  Can someone confirm that this is a bug in 2023 TurboTax?  Is the only way to correct this is to manually remove the T-Bill income from the federal side and reprocess the state form?  Thanks

[bill12215]

Never mind.  Looks like an operator error.  It does appear it is deducting the T-Bill income on the state side.

[flame58]

1) My 1099-Int includes both interest that is taxable by the feds and in NJ (box 1) and interest that is tax exempt in NJ (box 3).  I clicked off the box that stated that "my state does not tax all this interest, but on my NJ return it is showing that all of the interest (both box 1 and 3) is tax exempt.  How can I correct this?

2) I followed the steps below for omitting the interest on treasury bills (1099-B) - listing it and then clicking omit, but it doesn't seem to actually do anything.  The interest is still marked as taxable on my NJ return.  How can I correct this?

[wnetmw]

I reported this bug to Turbotax two years ago.  TaxAct at the time had the same bug.  TaxAct fixed it.  TurboTax did not.   Good luck getting it fixed!

Omitting the offending 1099B after filing the federal return, will get the state tax right but will under-report the NJ tax exempt interest, if you care.

[jman3]

@MonikaK1

Just to follow up, you wrote that the NJ "Disposition of Property" allows to check the corresponding box in the Omit column to exclude the listed sale from New Jersey tax if it is nontaxable by that state.

When I click this omit box, it does not change my NJ tax due (which should decrease). It seems from the recent posts on this thread that others have experienced this issue where the omit function does not really exclude it.

Is there a reason why that happens or is it an error in the program? Thanks!

[ash49]

My followup question has to do with 1099-B for ETFs and Mutual funds, wherein a fraction of assets in each are US Govt. Obligations which are NJ Tax exempt.  Clicking the Omit box (if it works at all) deems the whole amount exempt, which is incorrect.  It doesn't let me modify the value for that entry to reflect the applicable part of the amount that should be NJ taxable and thus the balance tax exempt.  How to accomplish that?

[sakang12]

This does not appear to address the issue and applies to all states where interest from US Treasury Notes are state tax free. This type of income is reported on a 1099-B and includes "Accrued Market Discount" but TurboTax DOES NOT adjust the State 1040 Tax Form to not include this as income and subsequently are taxed on this income at the state level. Only way around this is what one commentor wrote is to file Federal Income Tax, remove this income and file Stat Income Tax.

TurboTax please fix this issue!