NJ Tax Treatment for taxable bonds

[wnetmw]

My understanding is that NJ does not allow a deduction for amortized bond premium from interest income even though it is allowed on the federal side.  This is based on the NJ Gross Income Statute using the term "interest" which is taxable instead of using the term "net interest".  Following that logic, accrued interest paid on purchase a bond would also be disallowed as a subtraction. 

Can anyone confirm?

How would you add these items back in the Turbotax NJ module?

[DMarkM1]

No. According to NJSA 54A:5-10(c) - NJ uses the federal adjusted basis to calculate the gain on the disposition of an asset.  So basis has increased by the accretion amount taxed each year so that when the bond is sold, accrued interest paid is part of basis both at the federal level and with NJ. 

There would be no add back in the NJ interview.    

[wnetmw]

I may not have been clear.  Let's step back and separate the two issues.

In a discussion with the NJ Division of Taxation about a different topic, the person pointed out that in

NJSA 54A5-1 which defines NJ gross income, paragraph e uses the term "interest" and NOT "net interest". 

So if you read that to mean "gross interest" which the NJ Taxation person does, the amortized bond premium is NOT deductible from NJ taxable interest.  It however is deductible from federal taxable interest.  Turbotax and other tax programs bring the net interest down from federal Schedule B and use that as NJ taxable interest. 

That would be incorrect according to the NJ Taxation person and you would need to adjust the NJ taxable interest by adding back the amortized bond premium.  So Turbotax may not be in compliance with NJ tax regulations.

I have not heard or read about this in the NJ instructions or any where else about this interpretation, so 

I was looking for confirmation.

As a numerical example if you bought a premium bond at 105 and it matures at 100, both NJ and federal would use 100 as the adjusted cost basis, so no gain or loss.  But in NJ, you lose out in deducting 5 points over the holding period of the bond from your taxable interest.

The second issue was not discussed with NJ Taxation, but my concern was if we extend the net interest concept to the accrued interest paid when purchasing a bond between coupon dates, then a similar problem arises.  Accrued interest paid in purchasing a bond is deductible from federal taxable interest in the year paid on federal Schedule B.  Would accrued interest paid need to be added back for NJ taxable interest? 

These would both be bad for NJ taxpayers. 

If audited, I would be happy to blame TurboTax.

[DMarkM1]

The NJ form 1040 does not have any instructions to add any interest to NJ income that is not included in line 2 on a federal form 1040 which flows from Schedule B.   

[FMSMNJ1]

in looking at the New Jersey 1040 instructions for Taxable Interest it states: Line 16a – Taxable Interest Income
Enter all of your taxable interest from sources both inside and outside New Jersey.

It does not reference the the amounts used on the Federal return or a net number after deducting for bond premiums reported for a particular bond on the 1099.

[DaveF1006]

Yes, you are correct. . The New Jersey 1040 instructions say that you must report all taxable interest from both inside and outside New Jersey. However, it doesn't explicitly mention using the amounts from the federal return or adjusting for bond premiums reported on the 1099.

This means you should include the gross taxable interest income without deductions for bond premiums unless otherwise specified in the New Jersey tax guidelines. In NJ, there's no deduction for bond premiums.

[wnetmw]

@DaveF1006 Note that the instructions for NJ 1040 does NOT use the term "gross" interest, which it could have to make things clearer. 

Having said that and to take your point of view, how would you add back the bond premium in Turbotax NJ module since it takes it from Federal form B. 

Is this a bug in TurboTax that needs to be fixed ASAP?