Allocating Interest on U.S. Government Obligations to More than One State

[mkaprelian]

     Some dividends reported on my Form 1099-DIV consist of interest on U.S. government obligations. I need to allocate this interest between two different states. On my federal return, I'm prompted for the total amount of interest of U.S. obligations, but I don't see any way to divide the total between two states. The total amount is then carried forward to each of my two state returns. I don't see any way to adjust it there, either, so the whole amount is counted twice and deducted from both states. (Actually, the whole amount is deducted from one state (MD) and an additional (mysteriously calculated) amount is deducted from the other state (PA)). How can I enter the correct state allocations of my interest on U.S. government obligations? 

     This question was asked in a prior year (several times, in fact, by @Pip_12_mn), but the answers, such as they are, refer to interview steps that do not exist (or at least I can't find them). 

[DaveF1006]

To clarify, what two states?

[mkaprelian]

Maryland uses the entire amount of interest on US government obligations; Pennsylvania calculates a somewhat smaller amount. The net result is that TurboTax is deducting more than 100 percent of the interest earned on US government obligations from the 2 states combined.

[Pip_12_mn]

I unfortunately never got a resolution from turbotax on my 2024 taxes regarding how to properly allocate US Treasury Obligations for a part year MA state return. I  ended up having to file with a different tax program since Turbotax simply couldn't handle it. I spoke on the phone with an agent and went in circles with tax experts on the forum but nobody could resolve the issue. To their credit they really did try to help.

If memory serves me, there was a TT workaround to create a second version of the Federal Return (before e-filing the correct return) that would exclude the proper part year US Treasury obligation just to make the MA return generate properly. You would scrap that federal return and only use it to generate the correct MA return which would have to be paper filed. The correctly filled out Federal return (which excludes the total US Treasury Obligations for both states)  would be used to create the other part  year state return which TT handled properly.

I assumed the problem would have been fixed by now. Possibly the OP found this problem with another state?

[mkaprelian]

A disappointing outcome. I'm hoping someone has a better answer in my case. Thanks for responding.

[DaveF1006]

It depends.  Maryland and Pennsylvania both give you a subtraction for interest from U.S. government obligations, but they do it in different ways, and TurboTax doesn’t coordinate the two states. 

That’s why the combined subtractions add up to more than 100% of your actual interest. The tax rules don’t require states to “share” the deduction, and TurboTax doesn’t block this kind of overlap.

Maryland is prohibited from taxing U.S. government interest under federal law. Maryland’s own guidance confirms this: "Maryland cannot tax interest on U.S. obligations. Maryland therefore, subtracts 100% of qualifying U.S. government interest".

Pennsylvania also excludes interest from U.S. government obligations from taxable income. The state sometimes uses a different percentage when the income comes from mutual funds or ETFs, because only the portion attributable to U.S. obligations is exempt. This is why your PA subtraction is smaller.

Why TurboTax shows more than 100% combined

1. TurboTax treats each state return independently:
2. Maryland subtracts 100% of the qualifying interest.
3. Pennsylvania subtracts its own calculated portion of the same interest.
4. TurboTax does not coordinate the two states or limit the combined effect. This is expected behavior because:

• Each state is applying its own law.
• Neither state cares what the other state does.
• There is no rule preventing the same federal interest from being exempt in multiple states.

@mkaprelian 

[mkaprelian]

Just so I understand your answer @DaveF1006 , consider the following hypothetical: I lived half the year in Maryland and half the year in Pennsylvania. I get my Form 1099 and it says I earned $1,000 in interest on a money market fund. I look up the supplemental information from the fund sponsor, and I see that 85 percent of the interest for this fund consists of interest on U.S. government obligations in 2025. I work on my federal return, and get to the screen in TurboTax that prompts me for interest on U.S. government obligations. I multiply 85 percent times $1,000 and enter $850. When I get to my state return for Maryland, I have to figure out how much income I earned while living in Maryland. My income for Maryland totals $50,000, including $500 in interest from my money market fund. TurboTax carries over the $850 dollars I entered in the interview for my federal return and subtracts all of it from my Maryland income. So the program deducts not only the entire $500 of interest on my money market fund, but also an additional $350. My income for Pennsylvania totals another $40,000, including the remaining $500 in interest from my money market fund. When I get to my Pennsylvania return, TurboTax applies some kind of calculation and deducts some percentage (less than 100%, let's say 50%) of my interest on U.S. government obligations that works out to $425. As a result, I've now earned $1,000 of interest on my money market fund, deducted $1,275 of interest on U.S. government obligations from the two states combined, and deducted more interest on U.S. government obligations in Maryland than the total money market interest I earned in Maryland.  Correct result?  

[DaveF1006]

Maryland law  considers you a full resident for tax purposes if you live there for more than six months (specifically, more than 183 days). It's called the statutory resident law. 

If you meet the 183-day rule, Maryland treats you as a resident for the entire tax year. In this case, Maryland taxes 100% of interest income, including interest from states other than Maryland (which must be added back to your Maryland income). 

If both states claim you as a resident (dual residency) or if PA taxes the same interest income, you generally claim a Credit for Taxes Paid to Another State on your Maryland return to prevent being taxed twice on the same dollar.

To claim a credit for taxes paid to Pennsylvania (PA) on your Maryland return, you must use Form 502CR. This credit helps offset the fact that Maryland may tax 100% of your income if you are a statutory resident, while PA also taxes certain non-wage income like interest. TurboTax may have this form already completed for you in your return.

One last note, new bills (SB0059 and HB0183) were introduced in the Maryland General Assembly in 2025 to shorten the residency requirement from 6 months to three months. I am not sure if these bills were passed but if your residency in Maryland was less than 183 days, your tax exempt interest will be taxed at 100% in Maryland if those bills were passed.

One last note, you raise the concern that your deduction was more than your interest earned, thus creating a mismatch between your federal and state reporting. Reporting more interest to Maryland (MD) and Pennsylvania (PA) than you did on your federal Form 1040 is  not a "red flag" because it reflects specific state tax laws that differ from federal law.

@mkaprelian 

[newusernameagain]

Seems ripe for a court challenge that MD requires you to pay taxes on 100% of the year's interest when you only lived there for 3 months.

[mkaprelian]

@DaveF1006 I very much appreciate your willingness to engage on this question. I understand that the state tax treatment of this item might vary, might not be consistent, and might not neatly reconcile to my federal return. I  was not aware of the Maryland rule you cited. But in my case, I don't think that's the answer. My Maryland residency was through 6/30/2025. I entered this date into TurboTax when it prompted me for residency information, and TurboTax recorded it correctly in the "Part-Year Resident Box" on page 1 of Form 502. By my count, my Maryland residency adds up only to 181 days. Under these circumstances my understanding (correct me if I'm wrong!) is that only the income (including interest income) I earned during this 181 day period is taxed by Maryland, so I dutifully added up all of the money market dividends I actually received between January 1 and June 30 so they could be reported on my Maryland return and reported the remainder on my Pennsylvania return. (I realize there might be other valid ways to estimate the allocations but since I had the exact numbers I used them.) TurboTax did not generate a Form 502CR on my return.

[DianeW777]

The facts were laid out for you. It's up to you if you prefer to report the income for the residency periods. 

Be prepared should Maryland (MD) come back for the rest of  the income they may indicate they are entitled to, however, keep in  mind that @DaveF1006, did provide information for the 'Credit for taxes paid to another state' on the same income. In the end, if you need it, you can always fall back on that which will provide at least part tax relief.

@mkaprelian 

[mkaprelian]

@DianeW777 @DaveF1006 The facts laid out for me (residency for 183 days or more) are not my facts. Did you even read the posts above? I sure would appreciate some additional insights here.

[DianeW777]

I agree with you. I will admit that your total days of residency in Maryland (MD) are 181 days which would eliminate the 183 day (more than six months) rule. After actually counting the days, this does not apply to you. I should have realized this from what you laid out for us and for that I thank you for coming back.

In your situation you have completed both returns accurately and should be confident in filing them, as part year residents and with the appropriate income for each state. You have the tax law on your side should either state come back with questions. Your details are absolutely accurate.

• I  was not aware of the Maryland rule you cited. But in my case, I don't think that's the answer. My Maryland residency was through 6/30/2025. I entered this date into TurboTax when it prompted me for residency information, and TurboTax recorded it correctly in the "Part-Year Resident Box" on page 1 of Form 502. By my count, my Maryland residency adds up only to 181 days. Under these circumstances my understanding (correct me if I'm wrong!) is that only the income (including interest income) I earned during this 181 day period is taxed by Maryland, so I dutifully added up all of the money market dividends I actually received between January 1 and June 30 so they could be reported on my Maryland return and reported the remainder on my Pennsylvania return.

@mkaprelian 

[mkaprelian]

Thank you, @DianeW777, I appreciate that. But we're not done here yet. TurboTax allows me to report the correct amount of dividend income on my Maryland return (which we just covered above), but I still have the problem of getting TurboTax to deduct the correct amount of interest on U.S. Government obligations from my Maryland return. Since we've taken a few detours since my original post, I will try to restate the problem more precisely below, describe a potential solution and ask you and the rest of the community if you have a better one. Also, since I'm not the only one, and Maryland is not the only state program, with this problem (see @Pip_12_mn's comment above and elsewhere), I'd like you to pass along the problem to your developers and see if they can fix it for next year.

I'd also like to point out, in view of @newusernameagain's interest in a court challenge, that @DaveF1006's comments about Maryland statutory residency, while interesting and accurate as far as they go, do not apply to me and are incomplete. The 183 day rule applies only if you also maintain a place of abode in Maryland for more than 6 months. That's not true in my case, but I can see how it could trip up some Maryland taxpayers who move late in the year. You can find relevant authorities here,  here, and here. Also, for completeness's sake, the statutory authority for part-year residents allocating income, deductions, etc. is here. (More to come.)

[mkaprelian]

So, @DianeW777 and @DaveF1006, how does TurboTax incorrectly calculate interest on my U.S. Government obligations for my Maryland part-year resident return? The process starts innocently enough. After entering a 1099-Div in the federal program, the following prompt appears:

Followed by this prompt. To respond to it, I multiplied the total dividends paid on a specific mutual funds by the percentage reported on the fund sponsor's "U.S. government obligations income information" document:

So far, so good. (More . . . )