I am doing my parents' taxes. They have some bond interest that is tax-free at the federal level but is taxed by the state of Colorado (It relates to bonds that are not Colorado-based). Some of this interest is off-set by the amortization of bond premiums they paid for these bonds. TurboTax uses a form called "Other Modifications to Federal Taxable Income Worksheet" to calculate the the net amount that has to be added as income on line 8 of the Colorado state tax form 104. Line 3a of this worksheet asks for the non-Colorado bond income. Line 3d of the worksheet asks for the non-Colorado bond premium. Then it nets the difference on line 3f which is then translated to line 8 of form 104.
My problem is that TurboTax appears to enter a bond income amount in 3a that is already reduced by an estimate of the non-Colorado bond premium. The worksheet then subtracts the non-Colorado bond premium that I actually entered into TT during the step-by-step interview questions (in line 3d). The net effect is that the the bond premium is effectively being subtracted twice.
Here are my values.
1099-INT for the bond income. (The Colorado vs. non-Colorado breakout is taken from the supporting info provided by the investment house my parents use.)
Line 8 Tax-Exempt Interest $14,930, $500 is Colorado, $14,430 is non-Colorado
Line 13 Bond Premium on Tax-Exempt Bond: $6,214, $66 is Colorado, $6,148 is non-Colorado
So, I think line 3a on the worksheet should reflect $14,430, line 3d should say $6,148 and the net on line 3f should be $8,282.
However, TT is placing the value of $8,424 in line 3a. I suspect it is calculating this value by using the ratio of non-Colorado interest to total interest to estimate the non-Colorado bond premium. I think it is then subtracting this estimate that from the non-Colorado bond interest and entering the net value into line 3a rather than the full non-Colorado interest. E.g. $14,430/$14,930 is 96.65%. If you apply that percentage to the total bond premium of $6,214, you get $6,006. If you subtract $6,006 from $14,430, you get $8,424.
Again, the result is that the worksheet subtracts $6,148 (line 3d) from the (already netted) value of $8,424, and enters a value of $2,276 into row 8 of Colorado form 104 instead of the $8,282 value I think should be there. The ultimate impact is that the taxable income for Colorado is lower than I think it should be. Although this benefits my parents in the form of a lower tax bill, I don't think it is right.
I'd like to have the TT staff look at this to see if I'm doing something wrong here or if TT needs a correction.
