US Treasuries and Muni Bonds

[rjabara]

I own US Treasury Bonds and various state municipal bonds (directly, not through a mutual fund)

I have a 1099INT imported to TurboTax from Fidelity that shows all of the transactions.

Boxes 1 (interest income), 3 (Interest on US Treasury Bonds), and 8 (Tax exempt interest) are filled in.

Question 1.  For the Federal Return, does TT automatically deduct the Municipal Bond interest from Federal taxable income since it is not supposed to be taxed, or do I need to manually do something here.

Question 2.  For the State Return (MD), does TT automatically deduct the US Treasury interest income as it is not taxed by state or local government, or do I need to manually do something here.

Question 3.  For the State Return (MD) Municipal bond interest, do I just need to document the MD  bond interest so in can be deducted from taxable interest income, or do I need to input all states?

Thank you.  Rich

[Hal_Al]

Question 1.  For the Federal Return, does TT automatically deduct the Municipal Bond interest from Federal taxable income since it is not supposed to be taxed?

A.1. Yes.

Question 2.  For the State Return (MD), does TT automatically deduct the US Treasury interest income as it is not taxed by state or local government?

A.2. Yes.

Question 3.  For the State Return (MD) Municipal bond interest, do I just need to document the MD  bond interest so in can be deducted from taxable interest income?

A. 3. Yes. 

After entering your 1099-INT, two screens later, you'll be asked "tell us if any of these uncommon situations apply".  Check the box "Our state doesn't tax all this interest". 

[rjabara]

Thank you.  1 and 2 are solved.

For question 3, I went back into the Federal return and added all of the state by state municipal interest income, including interest income from my state (from 1099 INT).  What this did was add the tax-exempt income back to my state return as MD taxes out of state municipal bond interest.  I am hoping I did it wrong as that is a bigger tax bill for me but it make sense.  As example, if I had $10,000 in Tax-Exempt municipal bond interest and $1,000 was from Maryland, the Federal return would exempt $10,000, but Maryland would only exempt $1,000, adding $9,000 back to interest income and then taxing it.

The uncommon situations checkbox only had an option to exempt income that was taxed at the federal level, which i not the case with muni bonds as they are tax exempt.

Does this seem right to you?

[Hal_Al]

Q. Does this seem right to you?

A. Yes.  The $9000 would be taxed by MD. 

It works this way in every state.  There is one  one minor exception. The states are not allowed to tax the interest from US territories (Guam, Puerto Rico, USVI)

[rjabara]

Thank you.

I am not an expert, but for others searching here, I think the message is that if you have out-of-state municipal bond income, and you are using TurboTax for both federal and state returns, you must input your total interest income  per state in your federal return.  This will transfer the correct amount of taxable income to your state return.  By not inputting the state by state income, your state return will not include this income (as it will transfer as tax-exempt), and you will be under-reporting income on your state return.

[Hal_Al · Accepted solution]

After entering your 1099-INT, two screens later, you'll be asked "tell us if any of these uncommon situations apply".  If you answer "None of these apply", the next screen will ask "Which state is your $#### of exempt interest from?" 

 When asked which state, check the box "I earned tax exempt dividends in more than one state". In the drop down menu, select your state and enter the $ amount you calculated. In the 2nd box, select "More than one state" (at the bottom of the scroll down list) and enter the remaining dollar amount.

[SteamTrain]

And you don't need to delineate every state....that would be a huge task.

All you need to break out is your own state (MD) interest, and any US territories.  The remaining $$ is all lumped in as "Multiple States"

examples for an NC resident

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[JL503]

TurboTax Premier Download for Mac is taxing US territory bond interest in Delaware. After breaking out exempt interest dividends by state (DE) and territory (Puerto Rico, Guam and USVI) on the FED form, the DE source income is subtracted from DE PIT-RES Line 2 correctly, but the US territories are not being added in to Line 5 (which would then subtract them from DE taxable income).  After 2 hours on the phone with TurboTax product support, the rep and I waited for the calculations group to reply but they never did. Then I was told there will be NO FOLLOWUP since they didn't answer the request while I was on the phone!!!  A few years ago, they corrected the Delaware calculations on the forms, but now they seem to be broken again.  They said I should override it and just enter the correct number, but then the font turns RED which will immediately call attention to that line when I file my taxes and probably cause an audit. 

I am trying to find someone who can help me with this who can get to the right group in TurboTax. Or help me turn the RED font black before I file. 

Case number [phone number removed]

Thank you in advance to anyone who can help with this!

[Hal_Al]

@JL503 

I had the same problem with Ohio, a few years back.  Ever since, I just add the territories to the Ohio amount. 

[SteamTrain]

Yeah, I did that for NC this year...just a total. 

But I also keep a spreadsheet for my records to show where the actual total $$ came from.

I wonder if I should change my answer/display....or let it be.

For UT residents, some Brokers are totaling all the specific states and territories that UT exempts, and generates just one % amount to use.

[JL503]

I considered that and may do that too. Thanks for your input. 

[JL503]

I read that about the brokers too. I also have a spreadsheet with the details. Sounds like this is an issue for more states than just Delaware. I just wish TurboTax would fix the software.  Thanks for confirming!

[SteamTrain]

It really wasn't an issue for my NC software...it works either way

But in the NC software, if I break out PR&NC amounts separately, then it just doesn't include either the NC or PR $$ amounts in the Other state's $$ added-back as state income (what would be your PIT-RES line 2).  SO for me, the PR $$ are already excluded.

Then My US Obligations, to be subtracted from NC income, (your PIT-RES line 5)......for NC, that only includes $$ from box 3 on 1099-INT forms + US obligation amounts extracted from box 1a on 1099-DIV forms. 

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(The NC software does miss any 1099-INT box 1 $$ from the TVA,  and certain other US-Backed Organizations ((FDIC, FLB, FFB etc) that I have to enter directly on the NC worksheet in Forms Mode using Desktop software)