Accrued Market Discount on US Treasuries for NJ tax

[advaitjoshi]

Hello,

Have a question re. Accrued Market Discount on US Treasury bonds and how to code it correctly for NJ tax returns. 

The Accrued Market Discount appears on 1099-B with an adjustment to the sales proceeds so as to not be counted as gain, but instead is added to Interest Income. 

Interest income and capital gains from US obligations are exempt from NJ taxes. However, since this income is not entered as 1099-INT or 1099-DIV, one cannot indicate at data entry that this income is exempt from NJ taxes. Has anyone found a way to mark it as non-taxable for NJ taxes and correctly exclude it from the Interest Income on NJ taxes?

Regards,

NJ taxpayer

A 

[baldietax]

there's a lot of threads on this topic in the "getting taxes done" forum, if it is exempt for your state (which can be ambiguous or disallowed in some states) - the only general solution I've seen without trying to manipulate the 1099s, is to make a "miscellaneous" subtraction on state taxes with explanation, which most state programs should support or provide similar feature, tho some have reported it precludes e-file (NY I think was one example).

[PAJH]

Same problem with PA Program - forcing PA tax on US Govt Bond Maturity/Gain as "Taxable Interest".  Seems like a bug Turbo Tax should have fixed by now.

[MarilynG1]

On your Federal 1099-INT form, you can indicate the interest is non-taxable in New Jersey.  This carries over to the NJ Int/Div Worksheet, and NJ 1040, page 2.

@advaitjoshi 

[advaitjoshi]

Thanks for your detailed response.

Unfortunately, the Accrued Market Discount on US Treasuries is not on a Form 1099-INT where I can mark the interest as non-taxable in NJ. It is on Form 1099-B. And no ability in TurboTax to mark income on 1099-B as non-taxable for NJ even though the NJ tax forms clearly mark that as non-taxable income (see below) --

From NJ-1040 instructions --

Examples of Exempt (Nontaxable) Income Do not include the following income when determining if you must file a return. These items should not appear anywhere on your form except for tax-exempt interest, which you report on line 16b.

...

Interest and capital gains from (1) obligations of the State of New Jersey or any of its political subdivisions; or (2) direct federal obligations exempt under law, such as U.S. Savings Bonds and Treasury Bills, Notes, and Bonds

[advaitjoshi]

Thank you. Could you include a link for a few threads that you mention?

[baldietax]

Hi yes below are some of the threads

There was an interesting suggestion recently in one of these (following link with example) to use the "US Gov Obligations" adjustment on a 1099-DIV to book the AMD to your state subtraction - not putting it in Box 1 as that would duplicate the 1099-B transfer that can't be turned off, but just adding to the US Gov Obligations amount...

https://ttlc.intuit.com/community/taxes/discussion/re-accrued-market-discount-on-treasury-bonds/01/3...

From some quick testing it seems TT doesn't enforce this amount needs to be less than Box 1, which is probably a flaw in TT, and whatever you put there should hit your state subtraction.  If you don't want to hack an existing 1099-DIV and want to be more transparent you could also try entering a 1099-DIV called "AMD STATE ADJUSTMENT" or something like that, with $0 in Box 1a and the AMD as the US Gov amount (which would appear in your Fed return Schedule B, but with $0 impact on Fed income).

Not a CPA/expert so I'm not endorsing or vouching for any side effects, just passing on for others still stuck on this issue or unable to adjust their state return.  I already filed with miscellaneous adjustment on my state return so I have not seen it work end to end thru filing.

Other threads (first is the original one from 2023, others more recent)

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-treasury-bonds-state-t...

https://ttlc.intuit.com/community/taxes/discussion/re-i-bought-trsy-notes-at-a-discount-my-broker-s-...

https://ttlc.intuit.com/community/taxes/discussion/re-accrued-market-discount-on-new-york-tax/01/357...

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-treasury-bonds/00/3156...

https://ttlc.intuit.com/community/taxes/discussion/re-accrued-market-discount-on-treasury-bond-ny-st...

https://ttlc.intuit.com/community/state-taxes/discussion/re-bond-interest-not-taken-off-illinois-tax...

[David 25]

You can't update the form in turbo tax home and business edition. What will be a way to get around to adjust the AMD as tax exempt interest for NJ state. 

Cleary a bug for the TT software, that bug costs me dearly. What is the best way to fix the issue? 

[wnetmw]

One of the threads mentioned above stated that you cannot fix this in the step by step view.  You must go into forms view and make a change.  I followed that and Turbotax let me e-file, but it is still pending in the NJ system.   (Federal was accepted.)  I got confirmation from NJ Division of Taxation that accrued market discount on UST is tax exempt, but it is not true in every state. 

TaxAct has a nice screen in their NJ module.  It presents what it thinks are NJ taxable and tax exempt interest and allows you to adjust them. 

Wish Turbotax had this.