2023 Colorado subtraction for U.S. government interest not working?

[tomis916]

I've entered the amount of U.S. government interest on the Federal input screen.  When I go to my Colorado tax return, the software acknowledges that I should have a subtraction for U.S. government interest and asks if I have any additional U.S. government interest that can be subtracted for the purposes of my Colorado tax return.  It doesn't seem to matter whether I leave this screen empty or re-enter the U.S. government interest amount a second time.  Either way, the next screen tells me that my subtraction for U.S. government interest is $0.  Looking at the Colorado subtractions form, it also shows $0.  Is this subtraction working for anyone else?

[JohnW152]

Most likely, the U.S. government interest has been entered in the wrong field in the federal portion of TurboTax. 

To trigger the Colorado subtraction, it should be entered in Box 3 in the Form 1099-INT section in TurboTax.  The amount is often mistakenly entered in Box 1, which won't generate the subtraction.

To verify this 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
3. Select Start, Pick up where you left off, Review/Edit or Work on other income, as appropriate
4. Scroll down and select Edit/Add to the right of Investments and Savings (1099-B, 1099-INT, 1099-DIV, 1099-K, Crypto)
5. Select the dropdown to the right of the relevant Interest (1099-INT) entry
6. Select  Edit
7. On the  Now, let's review your 1099-INT screen, make sure you have your amount entered in the Box 3 - Interest on U.S. Savings Bonds and Treas. obligations field.  Delete any unnecessary entries on the screen, then select Continue
8. Continue through the following screens

[tomis916]

Thanks for your reply.  I should have clarified that the U.S. government interest was interest included within Box 1, Ordinary Dividends on Form 1099-DIV.  The 2023 input screen for Form 1099-DIV has a follow-up question that asks if any of the following uncommon situations apply - the first of which is a portion of the dividends is U.S. government interest.  I checked that box and then it asks for the amount of U.S. government interest.

On the state screen it acknowledges the correct amount of U.S. government interest that should be subtracted, but then after appearing to calculate, concludes that the subtraction amount is $0.  I went back into my 2022 tax return as if I were going to amend it, and it appears that this worked in 2022, but not for 2023.

Perhaps it has nothing to do with it, but between acknowledging the amount of U.S. government interest and calculating the subtraction amount is $0, the software asks me for the portion of the U.S. tax exempt income subject to tax in Colorado (the Colorado add-back amount).  I have a significant Colorado add-back.  I could just reduce the add-back by the amount of U.S. government interest, but this isn't correct.  U.S. government interest is a subtraction and the Colorado add-back is an addition and they are reported on different forms.

I'm not clear how to report a software correction to Turbotax.  I'll probably just move on.  Thanks again for our time.

[tomis916]

Just in case anyone with the same fact pattern runs across this issue, I figured out how to avoid it.

The software seems to be conflating the issue of a subtraction for U.S. government interest with an addition for federal tax-exempt income which is taxable in Colorado.  As I mentioned above, in the Colorado state module  in between telling me the correct amount of the U.S. government interest subtraction and calculating the subtraction for U.S. government interest to be $0, the software asks for the amount of federal tax-exempt income which is taxable in Colorado (the Colorado add-back).  If I say that the Colorado add-back amount is $0, the U.S. government interest subtraction comes through.  If you enter the correct amount of the Colorado add-back when you make the federal inputs for tax-exempt income, the Colorado add-back amount will automatically carry through to the Colorado income tax return - even though you enter $0 on the state input screen.

Hope that helps someone.

[JohnW152]

There's actually a more accurate way to capture the interest subtraction on your Colorado return.

But first, if you selected any answer other than None of these apply on the Do any of these uncommon situations apply? screen in the federal portion of TurboTax, that will need to be corrected.  To do this 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
3. Select Start, Pick up where you left off, Review/Edit or Work on other income, as appropriate
4. Select Edit/Add to the right of Investments and Savings (1099-B, 1099-INT, 1099-DIV, 1099-K, Crypto)
5. Select the dropdown to the right of your U.S. government interest entry, then select Edit 
6. On the Now, let's review your 1099-INT screen, make sure your amount was entered in Box 1 (since that reflects what was on your 1099).  Select Continue
7. On the Do any of these uncommon situations apply? screen, select None of these apply, then select Continue
8. On the Let’s finish pulling in your investment income screen, select Confirm

 Now, to enter the Colorado subtraction associated with your U.S. government interest in TurboTax Online: 

1. Open TurboTax Online
2. Select Tax Home in the left pane
3. On the Hi, let's keep working on your taxes! screen, select the dropdown on the right side of the State Taxes box, then select Start, Continue, or Review/Edit
4. In the left pane, select Prepare State
5. Proceed through the screens until you come to the Status of your state returns screen
6. Select Start, Continue or Edit to the right of Colorado
7. Proceed through the state screens until you get to the Here's the income that Colorado handles differently page
8. Select Start to the right of Interest from U.S. government sources
9. On the Interest and Dividends from Mutual Funds screen, enter the interest you received from U.S. government obligations (other than interest from Treasury bills and notes) that isn't subject to Colorado income tax.  Select Continue
10. You should see the subtraction on the Your U.S. Government Interest Subtraction screen that appears 

Interest from U.S. government obligations is typically exempt from Colorado income tax. 

To see if the interest you're reporting on your federal return is exempt on your Colorado return, see the Colorado Department of Revenue's FYI Income 20, United States Government Interest  factsheet. 

@tomis916 

[zelbinion]

@tomis916 Tom - thank you for posting your work around for the issue with how TurboTax handles US Government Interest on the Colorado return. I had the same problem. Your workaround does work, though I modified it slightly by including John's suggestion, but the key is to put in 0 for the "Taxable Interest and Dividends" that are taxable in Colorado but not subject to federal tax. This was the critical step you figured out. Thank you!

@JohnW152  - please re-read Tom's posts. He (and I) are referring to US Government Interest as reported on a 1099-DIV - NOT - a 1099-INT. Your suggested fix does not work by itself.

I am using the downloaded version of TurboTax 2023. Here are few notes to expand upon Tom's reply.

In my case I have:

a) Interest reported on a 1099-DIV which is tax exempt from Federal Taxes because it comes from state bonds. This is reported in box 12 of my 1099-DIV. SOME (but not all) of this interest is taxable in Colorado.

b) I have other income (included in Box 1a of my 1099-DIV) which is from US Government sources. SOME (but not all) is exempt from taxation in Colorado.

Here's how I got everything to come out right:

1. On the FEDERAL return, when entering information from my 1099-DIV, I filled in all of the appropriate values from boxes 1a through 13. 

2. When asked "Tell us if any of these uncommon situations apply to you", I check the box that says "None of these apply to me" (Even though that is incorrect - do NOT check the box that says "A portion of these dividends is US Government Interest" - we'll fill that in on the State return, and it doesn't normally affect your Federal return, so you should be able to skip it here.)

3. Turbo Tax then prompts for what portion of the interest which is exempt from US taxes comes from which states. In my case, interest from Colorado is exempt, but interest from other states is not, so I have to break out how much of the US Tax Exempt Interest is also Tax Exempt in Colorado, and how much is not, by listing the income from Colorado on one line, and the total from all other states on the second line.

4. Finish Federal Return

5. In the Colorado State return, on the "Interest and Dividends from Mutual Funds" screen it should not pick up any values from the Federal return. (NOTE: If you entered a value for US Government Interest when filling out the 1099-DIV portion of the federal return, TurboTax will pick it up here, but you can't change it -- it assumes that 100% of the US Government Interest is tax exempt in Colorado, which is NOT necessarily true.) However, there are three lines that allow you add additional income from US Government Obligations that is not subject to Colorado Tax.  I put in the amount that is EXEMPT FROM TAX in Colorado. Only interest from US Treasuries, Savings Bonds, etc. is exempt. Interest from Mortgages (Fannie Mae and Ginnie Mae) is not. A full list is here: https://tax.colorado.gov/sites/tax/files/Income%2020.pdf

6. Enter any other US Government Interest on this screen if needed, but only if you didn't already enter it when doing the federal return

7. When you press "continue", TurboTax prompts you to "Enter interest and dividends from a mutual fund you received during 2023 that are taxable in Colorado but were not subject to federal income tax." For me, TurboTax automatically populated the non-Colorado bond interest I entered with filling out the 1099-DIV on the federal return. While this is the correct value, the only way to get the Colorado return to come out right is to enter 0 in this field. This is VERY counter-intuitive, and I consider this bug in TurboTax's Colorado module, but if you enter 0 here, the right number still shows up on line 7, form 104 as it should. (Note: I think the 2022 version and possibly older versions of TurboTax had the same bug -- I had this problem last year but didn't know how to fix it.)

Doing the above worked for me -- the US Government Interest exempt from Colorado tax shows up correctly on line 2 of form 104AD, and the taxable portion of the US Government Interest shows up on line 7 of form 104. This was the only way I could get TurboTax to fill out the forms correctly.

[Dave-and-Kelly]

TURBO TAX PLEASE CORRECT THIS!

I could see what was happening and was about to give up reporting my US Gov Interest until I saw others had the same problem. I figured this was a glitch with the Colorado Tax Return. I was having the exact same issues as these other people and the work-around that they suggested fixed the problem. I haven't had this problem in past years. Colorado hasn't changed this section so it should work like past years.

UGGGHHH!