Oregon: deducting federal agency bond interest

[SteamTrain]

@GreenApple123   

I suspect TTX doesn't include an easy way to do this for many states.

For NC, I've always had to enter TVA & Home loan $$ on the NC deductions "worksheet", the NC Schedule S...and always in Forms Mode.    The worksheet does allow me to make additional entries without overrides.

For PA, you may have to look for a worksheet where such deductions are entered, to see if the PA form allows such extra entries.

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[Owl5]

Hi GreenApple123,

For Oregon, I haven't found any other way than to make the override as described in my earlier post. I'm not familiar with PA's returns. It's a shame that TT hasn't found a solution in their software to handle this.

[SteamTrain]

I don't have OR forms, so I can't see what's available, but if you make the entry in Forms Mode, and it's on that Oregon ASC form?  See if there is also an ASC "worksheet" in the list, and make the entry on the worksheet and not directly on the ASC form itself.   But, perhaps there is no worksheet.

[tharpasopa]

Amazing that TurboTax has not yet addressed this issue for now over three years.   Is it really that difficult to add a subtraction for interest on federal agency bonds?? C'mon TT--show some American ingenuity.

[Owl5]

This year, on the 2022 Oregon return, I was able to find a way to bypass TT's inability to recognize certain federal agency bonds as state tax exempt: I used the worksheet "Other Additions" and simply typed in the correction for Additions (for me, the Additions included muni bond interest paid to other states, which is taxable by Oregon). I then used the worksheet "Other Subtractions" , but had to over-ride the subtraction amount, which, for me, is the total of U.S. Treasury interest plus the interest from federal agencies that are state tax-exempt.

Both of these corrections then flowed correctly onto Oregon's Form ASC. When I ran a TT check for the return, it then said the Oregon return could be efiled. I didn't efile since it's cheaper just to drop the return off and get a printed receipt at the local Dept. of Revenue.

[Dr_TomW3]

I just ran across this doing 2023 CY taxes.  My question is related:  why don't brokerages do this correctly on thier 1099-INT's?  Since FINRA recognizes these bonds, it seems that contacting your brokerage would solve the problem.  if not, then file a complaint with FINRA.  Any thoughts?

[Wolfpv]

Hi - I'm new to large scale fixed income investing, so new to this problem - but I have a very large sum in TVA and similar non-governmental bonds which are exempt from State taxation (here in CA, not your lovely state).  It seems like the biggest part of this problem is not so much TT as the brokerages, which report this income on line 1 of the 1099-INT, so even if you try to override it in TT the IRS will see a conflict.  It seems like the brokerage needs to either report it on line 3 (as a "Treasury bond") or perhaps use bond 13 for the reported amount and box 14 for the CUSIP.  I'm going to contact Schwab on Monday to see if they can re-do their 1099; has anybody else tried to deal with this problem by addressing it with the brokerage?

[Wolfpv]

Oops - I mean "Box 13"

[SteamTrain]

(for a 1099-INT)

@Wolfpv 

Yeah...but the IRS would likely need to create a new box for those "Agency" $$ since box 13 only refers to box 12 $$, and 13  cannot be greater than the box 12 $$.

I would think that most states exempt "Agency" $$, and if they do, then perhaps those agency $$ should be directed to box 3.   But if some states do not exempt those Agency $$, then putting them in box 3 would create a bunch of unintended consequences for the states involved.

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CA software does have an area in the CA interview to remove the Agency $$ that may be included in box 1 of a 1099-INT:

See the last post from LivinTheOC below:

Re: How do I remove state exempt interest from Treasuries and Agency bonds on my CA state return? (i...

[fanfare]

@Owl5 

"there is no way (that I know of) to do this in TT without resorting to an override."

• e-File Federal return only.
• add interest received from these federal agency bonds
  to the amount on the tax document that corresponds to the state tax-exempt amount.
• e-File State return.

[Wolfpv]

Steam Train,

Thanks for the reply.  The approach suggested by your link is exactly what I did - list it in the state return as an additional adjustment (I even referenced the specific CUSIP of the TVA bond).  It certainly works from a software standpoint, but I suppose we'll see whether CA decides it should be audited.  This year it's just one TVA bond, but next year it'll be income from multiple TVA, FHLB, and FFCB bonds, representing substantial interest income.  I'm happy to report back to this thread if it raises problems.

[mgfrobozz]

In order to deduct interest from federal agency bonds in the Oregon tax return, you must declare that a portion of dividends you received is "interest on U.S. government obligations". That declaration is made when you are in the federal taxes section of the interview, and it's easy to miss:

• Click the "Show Topic List" button at the top of the screen
• In section "2. Federal Taxes", in the "Interest and Dividend Income" section, find the dividend that you need to declare. (For my taxes, it was "Form 1099-DIV (VANGUARD MARKETING CORP)"). Click on that dividend
• You should be in a page titled "Let's get the details from your 1099-DIV or brokerage statement". Click the button at the bottom right to continue to the next page
• Keep clicking to the next page until you reach titled "Tell us if any of these uncommon situations apply to you". In that page, check the checkbox titled "A portion of these dividends is U.S. Government interest"

Once you do that, you will find that the values has also been added to your OR-ASC form as a subtraction.

Repeat the process above for any ordinary (non-qualified) dividends. For Vanguard, these are listed in the "Detail for Dividends and Distributions" as "Nonqualified dividend" and/or "Section 199A dividend".

[SteamTrain]

@mgfrobozz 

Your solution is the normal way these Agency $$ are entered when received as "dividends" in box 1a of a 1099-DIV form...usually as a part of dividends received from a Mutual Fund.

BUT

All these issues in the above discussion are about US Agency bond $$ issued and listed in box 1 of a 1099-INT form.....received from individual bonds the person owns.   And there is no similar follow-up question for the 1099-INT forms.  (I just rechecked the software, in case they've adjusted the 1099-INT interview in the past few months....they haven't).   

Normally, US Treasury $$ will be listed in box 3 of a 1099-INT and will be handled appropriately by the state software as not being state taxed.......but US "Agency" $$ (TVA, FHLB, etc) will show up in box 1 of the 1099-INT.

Would be nice if the IRS would get together with the various states with an income tax, and see if they treat any, or all of these special US Agency $$ the same, and if so, direct the brokerages to start including those $$ in box 3 of the 1099-INT.   Then we all wouldn't be struggling with this somewhat subtle issue.

[mgfrobozz]

Thanks, SteamTrain ... good catch

For interest on U.S. government  obligations, after adding an entry for the interest, in the page "Tell us if any of these uncommon situations apply", there is a check box "Our state doesn't tax all of this interest"). However, it lists only 6 states, and not Oregon. This situation is definitely not uncommon, and TurboTax should change their handling for it. In the 1099-INT, box 3 is "Interest on U.S. Savings Bonds and Treasury obligations", and if that is non-zero, then they should automatically set the check-box for state exemption, for all states.

'Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes'
https://www.irs.gov/taxtopics/tc403

'Interest and dividend income on obligations of the federal government which are exempt from state income taxation but not from federal income taxation shall be subtracted from federal taxable income in arriving at Oregon taxable income'
https://oregon.public.law/rules/oar_150-316-0509
(The intuit server is getting cute with that url ... in the following url, change the lower-case z-s to hyphens:
https://oregon.public.law/rules/oar_150z316z0509)

[SteamTrain]

@mgfrobozz 

That "Uncommon Situations" selection, after the 1099-INT main page?

That "Our state...." selection is primarily for those few states who also exempt all, or a part of box 1 interest that came from those states', in-state Credit Unions or certain in-state banks.  If one enters anything there, it is only supposed to affect that particular state's software entries, and not any other state's forms.

The software TTX needs is to add another menu line, indicating something like:

" A portion of the $$ in box 1 represent dividends or interest received from US Agency bonds"

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The issue I see, is that I don't know whether all states exempt the same list of US Agency bonds.  TVA bonds is common, but there is an extended list of so-called "Agencies" that may, or may not be used, by all states.

For instance, my NC-exempt list includes:

1. Guam, Puerto Rico, or Virgin Islands (these would actually be in box 8 of the 1099-INT)
2. A Federal Land Bank
3. A Federal Home Loan Bank
4. A Farm Credit Bank
5. Export-Import Bank of the United States
6. Tennessee Valley Authority
7. Banks for Cooperatives
8. Production Credit Associations
9. Commodity Credit Corporation
10. Federal Deposit Insurance Corporation
11. Federal Financing Bank
12. General Insurance Fund
13. United State Post Office
14. Resolution Funding Corporation
15. Financing Corporation (chartered by the Federal Housing Finance Agency)

Most of which (except #1), would be interest included in box 1 of a 1099-INT when someone owns an individual bond from them.   Do all states, with an income tax, exempt the same list?    Don't know. 

(I think that some in that list may not really be US "Agencies", but NC exempts those $$)

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But NC also includes the following statement :

"However, interest paid on obligations where the United States is merely an insurer or guarantor is not deductable from federal taxable income or adjusted gross income, as appropriate. Examples include Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae"), and the Government National Mortgage Association ("Ginnie Mae")."

Interest Income from U.S. Obligations | NCDOR

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As far as box 3 on the 1099-INT is concerned, any $$ entered there are automatically deducted from state income by the software, for any state.  The menu item you are [pointing to on follow-up page, after the main form, isn't referring to box 3 $$ at all.