Net tax free interest different on FED and CA state return

[KathrynC]

The same issue on both mine and my daughter's return.  When I look at Fed tax free interest on 1040 it does not match what is on the CA state Interest/dividend worksheet.  They aren't off by a lot but don'r understand why not exact.  We have to split income between two states so we need to understand Bond interest minus bond premium by date to know which state gets what but difficult when our actual records don't match what turbotax is doing. Our records match the federal amounts but not the info transferred to CA.

[MonikaK1]

Depending on the types of bonds involved, the Federal amounts may be different from the California amounts. 

Federal law requires the interest earned on federal bonds (U.S. obligations) to be included in gross income. California does not tax this interest income. The following are not considered U.S. obligations for California purposes: Federal National Mortgage Association (Fannie Mae); Government National Mortgage Association (Ginnie Mae); or Federal Home Loan Mortgage Corporation (Freddie Mac).

California taxes the interest from non-California state and local bonds.

Regarding bond premium, you are required to amortize the bond premium each year and this will reduce your basis (what you paid).  So when the bond matures, your basis will be the face value of the bond.  

For tax-exempt and taxable bonds, this adjustment happens automatically when you enter the amount from Box 13 and Box 11 in the 1099-INT section of TurboTax.  The adjustment will reduce your amount of reportable tax-exempt interest on Form 1040, line 8b.  For taxable bonds, the adjustment will reflect on Schedule B, Part 1.

If adjustments for bond premiums are not reflected on your 1099-INT, you can manually enter the bond premium adjustment in the 1099-INT section of TurboTax.  This is also where you can report any accrued interest paid.

Please see the explanation and instructions in this thread for more information.

Please also see IRS Publication 550 for more information.

[KathrynC]

My situation is getting more complicated. I imported my 1099 from Schwab and then input the amount of individual Tax-Exempt Bond income by state using the easy step form.  The amount being reported on 1040 line 2a matches what I get when I subtract total bond premium from total tax exempt interest. Good up to this point. I compared this to the total tax-exempt on CA Int/Div/Adj worksheet line A. There is a $3 difference. I think this may be how TT handles rounding--I put all my amounts in with dollars and cents. I can understand this I think.

However the amounts on the CA worksheet for CA Tax Exempt interest and non-CA Tax Exempt income don't match anything. I've built a spreadsheet with every Bond, all the bond premium, etc and tried every combination to get to those numbers.  The closest I can get (within a few $s) is if I distribute all the bond premium on the same ratio as CA bonds to total Bond versus applying CA Bond Premium to CA interest. It appears to be:

CA Tax-Exempt Int / TTL Tax-Exempt Int = CA Bond Premium / TTL Bond Premium

So my revised questions:

How does TT handle Bond Premium to calculate tax exempt interest at the state level? Using specific numbers or on a ration basis like above?

How does TT handle Rounding?

Are there other worksheets within TT I can reference to see how the interest and bond Premium is being handled?

Thanks

[SteamTrain]

@KathrynC   

Could be a rounding issue

BUT, a couple questions, and possible answer in follow-up.

1) This is only for a 1099-INT right?

and

2)  IF you bought a Muni bond in 2022, Did you report any accrued interest you paid to the seller on a follow-up page after the main 1099-INT form?

[SteamTrain · Accepted solution]

@KathrynC 

Thinking about this some more, (after lunch and a walk) and ignoring any accrued interest you might have paid the seller for Munis you bought in 2022.

I'd bet the main difference is the bond premium amortization in box 13. 

TTX software can't know what portion of bond premium amortization to apply to just the CA bonds, and may just assign it proportionally.

______
So, subtract any $$ in the original 1099-INT that belong specifically to CA bonds in boxes 8,9 and 13 and put those $$ in a new 1099-INT from the same issuer.  Use the top selection with the one state as all CA $$ for that new 1099-INT.

On the former 1099-INT, that has the CA $$ subtracted out of it...you would again use the top selection as $$ coming from one state....(yeah it's not "one") but then scroll to the very bottom of the state list and select "Multiple States" for all of the box 8 $$ on that one.

_________

Accrued interest you paid the seller for any bonds you bought in 2022 could/might require another1099-INT  breakup, depending on what bonds the accrued interest was paid for.

[KathrynC]

The 1099 captured all accrued interest as when building my spreadsheet the amount on the 1099 didn't match my bond coupon received from my Schwab statements. When I looked at the details of purchase/sale transactions I found the accrued interest and when I added that to spreadsheet the numbers matched perfectly. My daughter is having the same issue so we'll do the same test of proportionally distributing the bond premium. If her numbers are as close as mine I think that's the answer. This is only an issue this year because we moved and we have to distribute the income between two states--which is hard to do when you can't get the core numbers to match.  Thanks

[KathrynC]

I did as suggested and split the 1099-super cleaned things up and allowed be to make logical operation of income between states. I did it on a duplicate file so I didn't mess up my original return. I'm going to split now on original return. Is there anything I should be doing or notes I should be making so the IRS/state tax agencies understand why my 1099 won't match what Schwab filed?

[SteamTrain]

@KathrynC 

You could make notes for yourself...as to what you did....spreadsheet might help too.

BUT IRS and state won't really notice, since they only get the results of your entries in what you file.  They don't get actual 1099-INT forms in what you submit...just the $$ that show on the main forms.  So as long as the final $ on yoru forms are consistent with what Schwab sends to the IRS separately, all is well.

_____

Those CA $$ shouldn't make a difference on the IRS forms.....but the CA FTB could always ask for the details of how you assigned the CA $$ later if they decide to audit you.   That's pretty rare, but is why you have your own notes or spreadsheet to show what you did.   

Yoru notes to yourself might also help in future years tax prep.  I've had to break out my box 8,9, &13 $$ for many years to get the $$ reporting exactly right.