Interest on US Gov notes and bond

[pkapadia]

I work in NY and live in NJ, and I have been using Turbo Tax for few years now.

Just finished my tax returns, but kind of confused why TTax subtracted Interest on US Gov notes/bond amount from NY state column on IT-203 tax form of NYState.

TTax asked how much of total interest income from Federal tax is NY Source income, and I replied -0- (zero).  So on IT-203 NYState tax form, TTax reported full interest as taxable income on line 2 under Federal amount column and none (zero) on NY State amount column.  But then, US Gov notes/bond interest is substracted from both Federal and NYS amount column on line 27 from both column adjusted gross income line 19.

NYS tax guide ono page 23 of https://www.tax.ny.gov/pdf/2022/printable-pdfs/inc/it203i-2022.pdf , reads:

Line 27: Interest income on U.S. government bonds
Did you include interest income from U.S. government bonds or other U.S. government obligations on lines 2, 6, or 11?
• If No, go to line 28.
• If Yes, enter in the Federal amount column and, if applicable, the New York State amount column the amount of interest
income you earned from bonds or other obligations of the U.S. government.

I hope any TTax software developer/expert can explain me why US Gov bond/notes interest income is substracted from New York amount column when it is not included as taxable income under line 2?  It there a software glitch?

[MarilynG1]

Since you are a New Jersey Resident, NJ taxes all your income, which includes interest, dividends, etc.

New York only taxes you on income you earn there, and NJ gives you a credit for any tax paid to NY.

Which is why TurboTax subtracted your US Government interest from NY.  

Here's detailed info on Investment Bonds you may find helpful.

More info on How to File a Non-Resident State Return. 

@pkapadia 

[pkapadia]

But my US gov note interest is not included as taxable income for NY.  Then how can turbo tax subtract that amount from other taxable/wage income?  That means I am not paying NY tax on true taxable income.  Let me give s simple example:

Federal taxable income $100

Fed taxable US gov interest $10

NY state taxable wage $100

Above $10 from Fed taxable income already excluded on NYS taxable income. If you deduct this $10 from NYS taxable income, I am paying tax only on $90, which is wrong.

And BTW, US gov bond interest is also not taxed in NJ.  Please read pdf doc link page 23 for IT-203 NY non-resident tax form I posted in my first message. 

[LenaH]

If your IT-203 shows a deduction of U.S. government bond interest on Line 27 (but nothing on Line 2), you need to remove the interest amount on the screen, New York Subtractions Allocation. Make sure there is a 0 in this box. 

Please see the screenshot below for additional clarification. I was only able to replicate your error if I didn't enter an amount on the NY Additions Allocation screen, but did enter an amount on the NY Subtractions Allocation screen. 

@pkapadia 

[pkapadia]

Thank you LenaH.  That was my understanding as well and was trying to point out as why TurboTax is substracting my US gov bond interest from NY amount column on NY State IT-203 line 27. TTax should automatically not subtract when nothing is reported on line 2 under NY portion column. Hope they fix this software glitch immediately. 

[sweetpeel]

Nope, that doesn't solve the issue. The problem, as seen in your screenshot, is that the Federal amount should be $0, because it is already excluded from the interest amount on line 2.

This issue persists in TT 2024 and I have no idea how to fix it. In principle, I guess, one could force a corresponding addition onto line 22 to offset the subtraction, but maybe TT could actually fix this bug in their software? Ironically the EasyStep instruction even says to not include amounts shown on line 3 on 1099-INT when prompting for the NY State amount, but someone didn't get the memo that it should also be excluded from the Federal amount!

[sweetpeel]

Actually I realize now this is exactly how it's supposed to work.

Federal obligations (treasuries) are taxed at the federal level and are tax-exempt at the state level.

State obligations are exempt at the federal level and are (generally) taxed at the state level if it's for another state's obligations.

The EasyStep instructions are actually misleading, because box 3 on 1099-INT is not super relevant here. If you look at line 2 on IT-203 and compare the amount to your 1099's, you will see that it actually includes the interest from Federal bonds. Therefore, the answer to "Did you include interest income from U.S. government bonds or other U.S. government obligations on lines 2, 6, or 11?", in the IT-203 instructions, is "Yes", the interest from federal bonds is indeed subtracted from your federal income for the purposes of calculating federal tax under NY state law.

Whether you get to subtract it from New York taxes depends on your residency situation. For non-residents, since the interest was not from NY sources, it cannot be subtracted from NY income. So for the OP, the amount to enter would be zero for the state amount column. Residents would put the whole amount, since it meets the 50% asset requirement (which it obviously does as 100% of its assets are in the US government). I am not familiar with part-year residents (who use the same form as nonresidents) for NY, but NJ it would be based on whether you were a resident when the interest was received.

See also https://www.tax.ny.gov/pdf/memos/income/m95_4i.pdf.