CA State Taxes Federal Farm Credit Bank Bond Interest

[Tax Geek]

Hello, 

           The Form 1099 INT I received from my broker shows the Federal Farm credit Bank bond interest in Box 1. Federal Farm credit bond interest is not subject to state tax as it is interest from a farm credit bank. However, in turbotax it gets taxed automatically on my CA state tax return, as it is in Box 1 i.e. "Interest Income". How do I adjust my CA state tax return in Turbotax to avoid taxation of the Federal Farm credit bond interest ? Which section should I go to and where and how should I make the adjustment ?

Thank you for your help. 

[MonikaK1]

Under the Farm Credit Act, Farm Credit Debt Securities and the interest thereon are exempt from state, local and municipal income taxes.

Typically, interest from corporate bonds or banks will be in Box 1 of Form 1099-INT, 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. U.S. Treasury bonds are exempt from state and local income taxes but are taxable at the federal level.

• 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. 
• 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.

The Federal interview has several follow-up questions for interest adjustments, but they don't specifically address the Farm Credit Bank issue or California-exempt interest.

When you complete the 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. In the California interview, on the page "Here's the income that California handles differently", under Investments, select Start or Revisit next to "Interest and Dividends Adjustment".

On the next page, several items are listed. If none of those apply, select Continue.

Another screen appears (see screenshot) that allows you to enter any interest item that needs to be added to or subtracted from California income. You can enter "Farm Credit Bank" in the Description and the amount under Subtraction.

See this TurboTax tips article for more information.

[Tax Geek]

Thank you MonikaK1. This workaround was very useful and it took care of my issue. Appreciate the help.