Federal Home Loan Bank interest deduction in Minnesota

[jdnaylor]

My 1099's from brokers do not break out interest on these bonds from regular interest or include the amount with US treasury interest, so Turbotax transfers the wrong amount to my MN return.  How do I add in this interest in the exempt line so not taxable in MN?  Thinking of just using the override on form M1M to increase the amount, but maybe there is a better way?

[DMarkM1]

You shouldn't need to override.  Assuming the interest is US Treasury Obligation you would move the amount from a box 1 entry to a box 3 amount.  However, the brokerage should have already put the correct amount of interest earned from US Treasury obligations in box 3.  

Just because an entity does issue interest that is exempt doesn't mean it all is.  Below is an extract from MN Law on exempt interest subtractions.  So while Federal Home Loan Bank and Federal Farm Credit do issue exempt interest not all of their obligations are US Treasury and necessarily exempt.  The brokerage likely has included the correct amount in box 3 already. 

"Even though a listed agency generally only issues either exempt obligations or taxable obligations, it does not follow that each and every obligation carrying the name of that particular agency is either exempt or taxable. An agency may issue its own obligations that are exempt and also may handle private obligations that are not exempt. For example, the agency may administer, purchase and sell, insure, or guarantee an otherwise private obligation. Such action by the agency does not convert a private obligation into a direct and primary obligation of the United States of America and, therefore, does not make the private obligation tax exempt. The taxable status of each obligation must be determined separately..." 

[SteamTrain]

Deleted....not ready to push the situation further.

[jdnaylor]

But that is the whole point.  I own US treasury securities AND federal agency FFCB and FHLB bonds.  Both are exempt from MN tax.  But brokers always only include the UST interest in Line 3, while they report the FFCB and FHLB interest in Line 1, so there needs to be a method in Turbotax to deduct this additional exempt interest in MN without using the over ride.  I'm therefore assuming there is no method in TT per your answer and will use the override unless you advise another way.  I DO NOT want to change the input on the federal side by altering amounts in Line 1 and Line 3 of the 1099.  That sounds like a big audit flag to me.

[SteamTrain]

@jdnaylor    I have the same issue on my NC software for my TVA bonds.

I suspect that those $$ are not included in box 3 of the 1099-INT because the various states may not exclude $$ from the exact same set of agencies.  IF the income-taxing states could agree on exactly which of the various "Agency" bonds generate interest that they considered state exempt, they might be able to talk the IRS into enacting rules which directed the financial providers/brokerages to report those $$ in box 3 instead of box 1.

But how does one start such a conversation among all the state's income tax departments.

Certainly, TTX should be including a way to exclude those $$ in the tax software....perhaps an additional question on the follow-up page after the main 1099-INT form, asking "A Portion of this box 1 interest is from US-backed Agency bonds"...........similar to what they do for US Treasury interest included in box 1a on 1099-DiV forms.     (Though, many folks might get that confused with what $$ are already showing in box 3 for US Treasury bonds)

[DMarkM1]

Moving an amount from box 1 to box 3 in TurboTax 1099-Int entries does not affect or show up on a federal Schedule B.  The taxable amount of interest on Schedule B, Part I stays exactly the same.  The box 3 amount only affects the state return.

[SteamTrain]

I can kind-of see doing that, but it would be wise to keep a record/note of exactly how&why such $$ amounts were moved from box 1 to box 3 on the 1099-INT worksheet.   Especially a detailed record of which exact Agency bonds were involved.