Bond interest not taken off Illinois taxes

[pammby33]

Same question that has been repeated every year with no fix I can see for 2024 - see below. I thought we were investing in Treasury Notes and didn't expect to receive a 1099B. TT moved the amounts from D to B but is not picking up the fact that this interest is not taxable in Illinois.  

I see TurboTax has added US Treasuries Accrued Market Discount on Schedule B part 1 Interest for Federal tax. However, it is not showing on IL state Income tax return as subtraction.  How do I get this added on my state tax to get as exempt from income?

Appreciate any help. I can fix manually but would be better using TT that I paid to use for my taxes.

Pat

[SusanY1]

While the interest itself on a treasury bond is exempt from state taxes (and this should reflect on your state return), the accrued market discount is not.  

Only the interest that is a direct obligation of the treasury is exempt, which does not include the accrued market discount on bonds. 

[pammby33]

Thanks for the answer. Thankfully I imported the information directly from Morgan Stanley since I would have had no idea how to move the income from the Schedule D to the Schefule B - I'm not a tax preparer just a user. TT zeroed out the B and moved the taxable interest to the B.

Can you explain more about the market discount since I definitely count on this income being tax free to the State of Illinois and will talk to my investment advisor and change my investments if this is not tax free to the State of Illinois.

[pammby33]

Oops typo. Moved the income from the Schedule D to the Schedule B.

[MarilynG1]

Market discount is the difference between what you paid for a bond, and the maturity redemption price.  If you bought a $1000 bond for $950, your market discount is $50.  This discount must be included in your income, as interest, either over the period you own the bond, or when it is sold.  

In box 1f of Form 1099-B your broker is reporting the accrued amount of discount over the time you held the bond. TT will show it as interest income on Sch B (look and see if it's on that form), and then subtract the same amount from your gain on the sale (Form 8949), since it's already been reported elsewhere. 

Here's more info in this Guide to Investment Bonds.

@pammby33 

[pammby33]

Luckily Morgan Stanley imported the information into the correct schedules and moved the interest from Schedule D to the Schedule B. I would have had no idea that needed to be done or even how to do it.

When talking to my tax advisor she said the the interest is not taxed in Illinois - which is the reason I buy Treasury securities. However, TurboTax does not reduce Illinois income by the amount moved from the Schedule D to interest on Schedule B.

Isn't the interest moved to B tax free in Illinois? If not, I have to change my investment plans since I had no I wasn't buying original issue bonds.

[pammby33]

Thanks MarilynG for the reponse. 

[baldietax]

Many threads on this topic (see below) - there is a lot of ambiguity and debate on this depending on language of the state tax codes.  Not a CPA myself so can't advise but just wanted to provide some more context, hope this helps...

There is a general argument made on the internets that the AMD is coming from a third party on the secondary market (i.e someone else's loss from buying at original issue) rather than directly from the government (tho technically the market price may include some OID certainly coming from the Treasury); however plenty of arguments made the other way that it is anyways exempt depending on a particular state's tax code (parsing definitions of "interest" and "income derived from" etc).  NC resolved it in the courts as being taxable, other state tax agencies may have issued clearer guidance on handling of AMD, so it depends on your state.

If unclear or uncomfortable with the status it's best to consult with an advisor/CPA who is expert in the state tax code, which sounds like what you have done.

If the AMD is considered exempt for your state, the only solution I've seen for this in TT is to make a miscellaneous/manual adjustment with explanation in the state tax section which I believe most of the state tax programs handle in some form, tho some people reported this precluded e-file (NY was one I think); or file manually.

I have seen others comment that other software provides more flexibility but not tried myself.

Personally, I've stopped buying low coupon notes to minimize or avoid this issue and state adjustment in future, you can usually find T-Bills and higher coupon T-Notes trading at a slight premium for similar dates and yields on the secondary market which have simpler tax reporting.

A few of the many other threads on this topic (the first one is the main kicked off in 2023)...

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...

[pammby33]

Thanks for the very detailed response. I searched this topic in TT but didn't find all the valuable information you mentioned. Obviouly didn't use the proper search words. 

Though I am a CPA I have only done taxes for family using TT and no tax classes until this year at AARP as a volunteer. I went directly to the IL website and filed online using what I feel is the correct interest accumulation. I plan to tell my investment advisor I don't want to purchase anything that generates a Schedule D.