accrued US Treasuries discount handling on IL state tax

[EEDacho]

I have adjustments for other (non Treasury) bond income

[JulieS]

According to Michigan's DOR: "This subtraction must be reduced by related expenses used to arrive at AGI." 

The worksheet used for this field says: "From federal Schedule B, Interest and Dividend Income, Interest Income Smart Worksheet, Box 3, US Savings Bond/Treasury Obligations PLUS federal 1099-DIV Worksheet, Box 1a, U.S. Government Interest less related adjustments."
 

This means the adjustment can related to other bonds or exempt interest dividends. 

[EEDacho]

I have only unrelated adjustments, no related adjustments. So remains a mystery?

[JulieS]

According to the Michigan DOR it is a related deduction if it reduces your federal AGI. 

[Greg Brown]

It's too late now to fix your problem for last years' taxes, but I just ran into the same problem this year, and I can tell you what's happening. If you have a 1099-INT with multiple line items, i.e. entries for both non-government and government interest, and then you add an adjustment, TurboTax doesn't ask you to identify which line item the adjustment applies to, it just pro-rates it across the multiple entries. I don't have a way to prove this theory, but in my case the numbers passed to my state return match this.

Did anyone figure out how to get TurboTax to pass "Accrued Market Discount" to the state return properly as US Government interest? I've called TurboTax support 3 times but have had no success in getting an answer.

[DawnC]

I was unable to re-create this issue, can you provide some details, and what state return(s) you are filing?  @Greg Brown 

The accrued interest is taxable to the seller, whereas the interest that is earned from the date of purchase to the end of the year is taxable to you.   However, at year-end, you will receive a Form 1099-INT Interest Income showing the total interest received during the tax year.   This total interest amount will include the accrued interest that is taxable to the seller and the interest that is taxable to you.   Therefore, you must note the portion of this interest income that is accrued interest, which is then deducted from your total interest to show the amount attributable to you.

If the interest is tax-exempt, then the total interest is not taxable; however, if some of the tax-exempt interest falls under the definition of accrued interest as mentioned above, it must be taken into account.  The amount of tax-exempt accrued interest must be subtracted from the total tax-exempt interest in order to find the amount of tax-exempt interest that is attributable to you.

[Greg Brown]

The state taxes were for Hawaii. Unlike what some others have reported, I was unable to edit or override any of the federal data transferred to my state return within TurboTax.

[AmyC]

You could take it as a subtraction on the HI return. You can enter any federally taxed income that is not taxed by Hawaii.

@Greg Brown

[wkfasktax]

For whatever reason, I cannot find these input screen in my Maryland State TT. Are  these standard across all the State TT programs?

[MonikaK1]

Are you asking how to ensure that Treasury interest is not reported as income on a Maryland return?

As other users in this discussion thread have mentioned, if Treasury interest is reported in Box 3 of Form 1099-INT, then it should automatically be excluded from State income, since it is excluded from all states' income.

Each state return in TurboTax has a customized questionnaire based on that state's laws. 

If you had income from Treasury obligations, and you were not a full-year resident of Maryland, the questionnaire will ask you to enter how much of the Treasury interest income was from outside Maryland.

After asking about any part-year resident allocations, the Maryland questionnaire will display a screen with a complete list of items treated differently by Maryland. Choose the Start button next to any that apply to your situation.

See this Comptroller of Maryland webpage for more information about Maryland state taxes for 2023.

[Alan Retired CPA - inactive]

I had the same problem on a 2023 PA state return. TurboTax correctly excluded actual interest received from US Treasuries but included the the discount, as interest income on PA, for US Treasuries purchased on the open market and redeemed at maturity. This was part of the yield to maturity when the Treasuries were purchased. In fact, TurboTax correctly showed the discount amount as interest on the federal return, and not as capital gains.

To fix PA I went into "Forms" on the state return and found a line labeled "Other reduction adjustments. See Instructions" and I entered, "ACCRUED INTEREST ON US TREASURIES REDEEMED" as the description and the discount amount. That did the trick.

How would inexperienced tax preparers, the average person, even know there was a problem when they are relying on  TurboTax to make the correct adjustments automatically?

[frodjius]

Same problem as Hawaii involving the Accrued Market Discount from US Treasury Notes being reported as Interest Income on Line1 of the 1099-Int not line 3 (below). For federal purposes it is Taxable but for State purposes it should be backed out.  However, I have an Illinois return and do not see on the Schedule M a catch-all Subtraction line i.e.  Other Deductions.  If I simple do a manual override to the amount from the 1099-Int Line3 to add the Accrued Market Discount to back it out there is no way to label it as Accrued Market Discount (which comes from the 1099-B).  Is there a way to show the Accrued Market Discount amount as a Subtraction to provide an audit trail?