On our taxes this year, we entered three 1099-DIV forms with some California tax-exempt interest on them. (For the remaining interest, we entered "Multiple States" as explained in the help.) Later, when working on the California state taxes, it says "Tax exempt interest of $XXXX transferred from your federal return."
However, the number seems incorrect. I think it's supposed to be the sum of all the amounts entered for California in the 1099-DIV's. After checking several times, I'm convinced that either it's a bug in TurboTax, or I fundamentally don't understand what's going on and the formula is something other than a simple sum.
Can anyone explain what's going on here? If not, how do I file a bug?
Were the amounts entered for California on your 1099-DIV all tax-exempt for both your Federal and California returns?
Some federal tax-exempt dividends are not always tax-exempt for state. State-taxable dividends often come from mutual funds or Exchange Traded Funds (ETFs) that hold a multi-state portfolio of municipal bonds.
All of the income from those bonds, other than than those issued within your home state, are taxable by your home state.
Click this link for more info on California Tax Exempt Dividends.
From the California Form 540 Instructions:
"Certain mutual funds pay “exempt-interest dividends.” If the mutual fund has at least 50% of its assets invested in tax-exempt U.S. obligations and/or in California or its municipal obligations, that amount of dividend is exempt from California tax. The proportion of dividends that are tax‑exempt will be shown on your annual statement or statement issued with federal Form 1099-DIV, Dividends and Distributions."
Since we can't see your tax return in this forum, you can request an Offline Review for a tax expert to review your return.
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Yes, I've learned how the law works. These are all bond funds. One is nearly all California tax-exempt and the other two contain less than 50% California state bonds (the remainder is other states), so an adjustment needs to be made in the state return.
The adjustment at the state level is difficult to make because Turbotax isn't starting out with a number that makes sense. I can separately calculate what it should be and put a number into the form to make it come out right, but it seems like TurboTax isn't doing the right thing.
(This is less about tax law and more about how TurboTax works.)