Treasury market discount is not tax exempted by TT on state tax (IL in particular)

[David Jabon]

I realize this is an old topic. Evidently TT has trouble carrying over Treasury bond market discount to the state forms (not just Illinois, but for Illinois in 2024 in particular). To be precise, I am referring to the following scenario.

You buy a treasury bond at a discount.  It matures in the tax year. At the federal level, TT correctly counts this discount as income on Schedule B, Part 1.   This is completely correct.  The trouble comes at the state level.  This Treasury interest income should be subtracted at the state level.   It is not being subtracted from the state.

The question is: how do you get this information added into TT without abandoning TT altogether and filling our your own state forms?

[SusanY1]

Market discount isn't exempt from tax at the state level. 

Only the interest received directly from the treasury is exempt from state taxes. TurboTax is handling it correctly as market discount isn't supposed to be subtracted from state income.  

[David Jabon]

I would very much like to see this in writing.  Could you please provide some written evidence for this position?

Publication 101 in Illinois is quite definitive and clear and states:

"What if I have income from obligations of the United States Government?
If you have income from stocks and obligations of the United States Government that is included in your Illinois base income, you may subtract the total amount of income and interest on the obligations from your Illinois base income." 

Notice the statement says "income and interest."   Publication 101 does not explicit state anything about "accrued market discount income" of course; otherwise there would be no question.

By the way, I finally did find a chain that does a reasonably good job of exploring the various aspects of this question. 

https://ttlc.intuit.com/community/state-taxes/discussion/accrued-market-discount-from-treasury-bills...

[baldietax]

I don't think there is a blanket writing in any tax code that applies to all states that says secondary market AMD is taxable because it didn't come directly from the Treasury (and some AMD could be OID); it depends on the state tax codes which vary in their language and interpretation (interest vs. "income derived from", and some states explicitly exempt gains on Treasuries).  If in doubt it's best to seek out CPA expert in your state.

similar thread...

https://ttlc.intuit.com/community/state-taxes/discussion/re-bond-interest-not-taken-off-illinois-tax...

and more recent thread of threads

https://ttlc.intuit.com/community/state-taxes/discussion/re-accrued-market-discount-on-us-treasuries...

In terms of solutions from all these threads, I've seen 2 practical possibilities:

1. Make a miscellaneous subtraction in your state return if the TT state program provides this ability.  Some have reported this precludes e-file, in NY for example.  Works fine in VA.

2. Use a 1099-DIV US Gov Obligations (USGO) entry.  See last thread for more details and link to an example from the person that thought of this, you can actually plug the AMD into a 1099-DIV as the USGO amount.  Not in Box 1 (which would double count AMD in Fed taxes as you can't turn off the Schedule B transfer), just the USGO $ amount which only impacts State - either using an existing 1099-DIV or create one just for this purpose with $0 in Box 1a (which would appear on Schedule B but $0 Fed impact).  TT doesn't validate that USGO amount should be less than Box 1a and will pass whatever amount there through to state subtraction.  I've not tried this myself so I can't vouch for any issues but it passed review in a quick test and I thought it was an interesting alternative to #1.

Not a CPA/Expert - hope this helps.

[David Jabon]

Thank you for your very thoughtful response and for sharing that workaround.  Overall, it is a little depressing that the tax code is so complicated that taxpayers are left to guessing what the rules are. Turbotax seems to have taken a position on the matter, but I have not found a clear, unambiguous justification for its interpretation (except in e.g. North Carolina).