Net Pennsylvania tax-exempt interest

[dcubed]

This is my first year using turbotax, and I cannot get my municipal bond interest income to be calculated correctly on my PA return.

The gross interest and bond premium amortization flow though from my 1099-INT from Schwab fine. I manually entered some accrued interest, which is also being handled correctly.

I *also* entered the portion of the gross exempt interest that came from munis issued from my home state, PA. This is entered as a dollar amount in the federal return section, but is only relevant for the state return.

The amount entered should be netted against amortization and accrued interest, and then flow through to line 3 (Net Pennsylvania tax-exempt interest) of the Interest Income Worksheet. This in turn is used to populate line 6 (Interest income from direct obligations of the Commonwealth of Pennsylvania and/or its municipalities) of schedule A. 

The problem: The amount flowing through to line 3 of the worksheet is the entire amount of net exempt interest, not the proportion that is actually from PA that I entered for my federal return. This effectively reduces my taxable exempt interest to zero, which alas it wrong.

I have changed the amount of PA muni income in the federal return to a very low number, and it still is staying at the full amount on the PA worksheet.

Anyone have any ideas before I spend 3 hrs on the phone with customer support trying to explain this?

[SteamTrain · Accepted solution]

Yeah...this has happened occasionally to a few others...usually for NY tax returns....but now wondering if PA has the issue too.

What they did to fix it  (for your situation) was to subtract out just the PA $$ in boxes 8, 9, & 13 on the 1099-INT that was for PA bonds, and create a new 1099-INT with just those PA $$....and use the top selection on the follow-up page to assign it all to PA.  (The "What state is this exempt interest from?" page)

Then on the former 1099-INT, that no longer has any PA Muni bond $$ on it....the top selection is again used...but assign all to "Multiple States".....the last "state" on the pop-up list.

That worked for them.  TTX may eventually fix the problem...but who knows when, and this "workaround" seems to work.

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Separate from your PA issue

A warning on "Accrued Interest" though.  IF any 1099-INT has $$ in any 2 of boxes 1,3, &8 on it, and you need to declare the accrued interest you paid the seller for a bond you bought......you need to put the bond type that needs the accrued interest declared..on it's own 1099-INT.  Otherwise, the accrued interest will be applied proportionally the $$ shown in boxes 1,3,&8.

Example:  a 1099-INT with $500 in box 1, and $500 in box 8.  IF you have $100 of Muni accrued interest to declare,, and don't separate out the Muni $$ into it's own 1099-INT, the $100 will be applied improperly as $50 to box 1 and $50 to box 8.

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Thus, for any particular bond type, for which you need to declare accrued interest paid out.

All $$$ of Boxes 1 &11 would go in it's own 1099-INT for accrued interest on corporate bonds.

All $$$ of Boxes 3 &12 would go in it's own 1099-INT for accrued interest on Treasury bonds.

All $$$ of Boxes 8,9, &13 would go in it's own 1099-INT for accrued interest on Muni bonds.

[dcubed]

Thank you very much- this fixed it completely and saved me a ton of time!

I ended up breaking the original 1099-INT into three. The first contained just the normal box 1 taxable interest. The second contained only the PA-exempt interest from box 8, as well as the amortization and accrued interest associated with that portion. The third contained all non-PA exempt interest from box 8, as well as the amortization and accrued interest associated with that portion.

Your help also fixed the weird accrued interest line I was seeing on my federal schedule B, which was an artifact of the prorating turbotax was doing in applying accrued interest to both taxable and exempt interest from the same 1099-INT. 

2 fixes in one solution- you rule.