Oregon: deducting federal agency bond interest

[joyndan12]

I am having a similar issue with Treasury bonds purchased at a discount.  The accrued market discount should be treated as Box 3 interest for Federal and Oregon taxation, but my broker reports it on a 1099-B instead of a 1099-INT and I can't figure out how to force Turbo tax to accept that as a code 315 subtraction on the ASC.  From the course of this thread over the last 5 years, I don't have much hope for a solution that allows me to e-file the Oregon taxes.

[JohnW152]

Follow these steps in TurboTax Online:

1. Select Tax Home in the left pane
2. On the Hi, let's keep working on your taxes! screen, select the dropdown to the right of Income & Expenses or Wages & Income
3. Select Start, Pick up where you left off or Review/Edit, as appropriate
4. Scroll down and select Add/Edit next to Investments and Savings (1099-B, 1099-INT, 1099-DIV, 1099-K, Crypto)
5. Select the dropdown to the right of the appropriate Interest item, and select Review or Edit
6. If everything is correct on the Now, let's review your 1099-INT screen, select Continue
7. On the  Do any of these uncommon situations apply? screen, select the box next to I need to adjust the interest reported on my form, then select Continue
8. On the Tell us about your interest adjustment screen, enter your adjustment amount, and select Other reasons in the Reason for adjustment dropdown
9. Continue through the screens, importing or entering any relevant information

You'll be able to see the adjustment in you state tax summary in TurboTax Online:

1. Select Tax Home in the left pane
2. Select the dropdown for any category in the middle of the page, then select Review/Edit
3. In the left pane, select the dropdown to the right of Tax Tools
   • If you don't see Tax Tools in the left pane, close any dropdowns in the pane -- for example, next to Federal or State Taxes 
4. Select Tools
5. In Tools Center, select View Tax Summary
6. In the left pane, you should see [Your State] Tax Summary.  Select it

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@joyndan12 

[mgfrobozz]

It would be simplest to ask your broker for details on the bond. They may refer you to your CPA, in which case here are a few possibilities.

How did you purchase your bond? If you bought it at original issue (at Treasury auction) and then hold it, the Treasury will report any accrued interest on a 1099-INT. This is a very common way to get ownership of a Treasury bond.

If you bought it on the secondary market, the bond will change accounts within TreasuryDirect (to your account),  and the Treasury will issue a 1099-B that indicates the cost/basis and any accrued market discount. See https://www.treasurydirect.gov/forms/sec0011.pdf.

If you inherited the bond, it would move from the owner's account to your account, also triggering issuance of a 1099-B. 

In publication OR-17 for TY 2024 (https://www.oregon.gov/dor/forms/FormsPubs/publication-or-17_101-431_2024.pdf), see "Subtraction code 315" on page 76; the next page lists qualifying bonds and notes. Note that "Interest and dividends on U.S. bonds and notes" qualifies, but "Treasury bills and notes—gain on sale" does not. And https://treasurydirect.gov/marketable-securities/tax-forms-and-withholding indicates "You get one 1099 for all your Treasury securities", and you didn't mention a 1099-INT, so I would infer you had no interest from government debt. That url also reads "1099 – B (Shows the proceeds you got for maturing securities not purchased at original issue)", so I would infer you had a gain on the sale which is not deductible under code 315.

PS. For another question related to 1099-Bs on Treasury bonds, see
https://ttlc.intuit.com/community/taxes/discussion/how-to-file-1099-b-us-treasuries/00/3248767

[joyndan12]

Thanks, JohnW, but the problem is not with the 1099-INT, which works as you suggest for both Fed and Oregon correctly.  This is the market discount which is reported on a 1099B.  The Federal return correctly treats this income as taxable interest income, but the Oregon return does not deduct it (and it should do so).  There is no unusual situations screen associated with the 1099B section like there is with the 1099 INT. 

[joyndan12]

Thanks, Mgfro…. you are correct that this is a secondary market bond, purchased at a discount to par and reported on a 1099B.  The market discount is correctly handled by TurboTax on the federal return, including it in. taxable interest income.  

As a federal govt instrument, this amount should be deducted from the Oregon income via code 315 on Form ASC.  1099INT interest is handled correctly by TT through the special situations screen JohnW refers to in a prior post.  But there is no such screen for the 1099B income.  So I need to adjust the Oregon ASC in some other way.  That’s what I can’t figure out.  I am still trying to use TT online, not the desktop version.  Maybe I need to switch to desktop and mail rather than efile like the original poster back in 2020. 

[mgfrobozz]

Does the 'de minimis' rule for capital gains (below) apply in your situation?

'Title 26—Internal Revenue Code
Subtitle A—Income Taxes
CHAPTER 1—NORMAL TAXES AND SURTAXES

Subchapter P—Capital Gains and Losses
PART V—SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS
Subpart A—Original Issue Discount'
https://uscode.house.gov/browse/prelim@title26/subtitleA/chapter1/subchapterP/part5/subpartA

Click on 'View" to the right of 'Sec. 1273. Determination of amount of original issue discount':
§1273. Determination of amount of original issue discount
(a) General rule

...

(1) In general

The term "original issue discount" means the excess (if any) of-

(A) the stated redemption price at maturity, over
(B) the issue price

...
(3) ¼ of 1 percent de minimis rule
If the original issue discount determined under paragraph (1) is less than-
(A) ¼ of 1 percent of the stated redemption price at maturity, multiplied by
(B) the number of complete years to maturity,
then the original issue discount shall be treated as zero'

Schwab quotes this as:

'If the discount is less than 0.25% of the bond's face value times the number of years to maturity, the discount is taxed as a capital gain in the year the bond matures.'

https://www.schwab.com/learn/story/when-should-you-pay-taxes-on-discount-bonds

[joyndan12]

Good idea, mgfro…, but no, that does not apply to my situation.  

[MarilynG1]

I tested this in TurboTax Desktop.  The Market Discount of $200 from 1099-B entry/Sch B Interest showed on the Oregon Other Subtractions Worksheet, Line 315.

The subtraction is shown on OR ASC, Section B, B2.  The subtraction amount from the OR ASC transfers to OR Form 40, Line 13, so it appears the Market Discount reported as Interest on Schedule B in the Federal return is being subtracted properly in the Oregon return.

@joyndan12 

@mgfrobozz 

@Owl5 

[mgfrobozz]

Hmm ... and it shows up as subtraction code 315 on OR-ASC. 

In the OP,  joyndan12 reported that no code 315 appeared in the OR-ASC, doing the same thing. 

[joyndan12]

Marilyn and Mgfro…. Thanks for the follow-up.  In TT Desktop, I am able to make the Oregon taxes work correctly, since I can adjust the forms directly.  My original post references TT Online which does not seem to carry over the market discount nor allow me to override the form.  I don’t yet know if using Desktop also means that I won’t be able to e-file as the 5 year ago thread stsrter discovered.