Montana Exempt Federal interest - Error warning

[mjwdhw]

Turbotax is generating the following error message:

"Subs Schedule: line 2, column A - Exempt interest and dividends from Federal bonds, notes and obligations should not be greater than taxable interest.  Interest on Form 2 column 2, line A is $."

I have determined the portion of bond fund dividend income reported on 1099-DIV that is derived from Federal bonds, notes and obligations, which I understand should be exempt from MT State taxation.

Montana Form 2 line 2, column A is for reporting taxable interest income - 1099-INT,  (which is zero).  Taxable ordinary dividend income (1099-DIV) is reported on Montana Form 2, column A,  line 3b.  

It seems like the warning is incorrect and that the Federal interest exempt from state tax needs to be less than the COMBINATION of 1099-DIV and 1099-INT income (MT form 2, column A, line 2b and MT form 2, column A, line 3b), but Turbotax doesn't recognize this.  Is this an error in the program?   Is there a work around?  

I can't find anything on Turbotax topic browsing, but found the following on TaxSlayer that seems to confirm that Federal dividend income should be exempt from the combination of interest and dividend income reported at the state level.

(TaxSlayer) "Interest On U.S. Obligations (Line 2) 
You can subtract interest received from U.S. Government Obligations and mutual funds attributable to that interest from your federal AGI as long as it is included in your federal AGI on Form 2. Amounts listed in the Federal Section under Interest or Dividends > Amount of Interest in US Savings Bonds subtracted from state return are automatically pulled to this line."

[MaryK4]

The TurboTax guidance says:  "The federal government taxes income you receive from its own bonds. Although your state doesn't tax income generated by U.S. government bonds, each state defines government bonds differently.

To find out if these dividends are taxable in your state, review your 1099-B along with the supplemental pages from your consolidated tax statement. If you can’t find the info, you might be able to get it from your brokerage or mutual fund company website.

Once you have found the info in your documents, just follow the screens here and we’ll help you enter an adjustment for the nontaxable amount in your state. When you get to your state taxes, we'll subtract the adjustment from the income reported to your state."

You had to enter the adjustment manually (see screen shot below), this amount is subtracted from the 1099-DIV Box 1 entry.  In general, the federal taxable amount is Box 1, so if the adjustment is more than the taxable amount, you will get the error you indicated, because the subtraction for Montana has to be included in federal income.  Because this amount is specific to the 1099-DIV, you cannot use a combination of other income.  See page 19 of the Montana Individual Income Tax Return (Form 2) Instructions.

[mjwdhw]

Thanks for the reply, but unfortunately you didn't fully understand my question or the problem with Turbotax.

I had no problem selecting the box in Turbotax indicating that a portion of interest was from us Government bonds.  I also had no problem identifying the types of Federal obligations that qualified for the Montana deduction and entered that amount on the subsequent screen to your screenshot.

The amount reported on the Federal 1040 as adjusted gross income and transferred to the MT state return (Form 2) reflects the full value of reported 1099 DIV income.  The amounts identified as derived from US Government obligations was NOT larger than the total reported dividend, nor was a portion excluded from the AGI transferred to the state return.  The error generated by Turbotax compares the MT 1099-INT income (zero, in this case) to the amount of 1099-DIV income that was derived from US Government obligations (which was greater than zero) and (wrongly) gives an error.  There should be no error if the qualifying US government obligations dividends are less than the reported total DIVIDEND income reported 1099 DIV (which it was).

Separately, I called Turbotax and while it was a long (2 hr time) on the phone, I was advised that my interpretation was correct and that while Turbotax flagged the error, the return could still be advanced to the final step of filing.  The agent at Turbotax told me that the programming error arises from the electronic coded feed that comes from the State of Montana, which appears to result in the error flag (incorrectly).  The Montana Form 2 printed instructions are clear that the portion of US Government obligations (that qualify) can be subtracted (on the Subs form) from the amount reported as DIVIDENDS on the Federal returns and on the MT State Form 2 return.

The "work around" is simply to ignore the error message and proceed with electronic filing.  Paper filing would accomplish the same thing, if explicitly following the written MT Form 2 instructions.