Accrued Market Discount on Treasury Bonds State Taxability

bluepost · Sep 20, 2023 8:07:24 AM

This thread is specifically to discuss how to get Turbotax to handle accrued market discount on Treasury bonds relative to preserving the state tax exemption on Treasury interest. This year Turbotax picked up the accrued market discount all by itself from the downloaded 1099 from my brokerage. It showed as interest for each bond it found, itemized separately, nicely written out on Sched B and supplemental forms. Then TT also did the trick of showing it as cap gain and then adjusting it out, so the effect on cap gains is zero. So far so good. But it did not offer a way to get the Treasury accrued market discount onto Schedule CA column B subtractions, which is where in California you exempt your Treasury interest from state taxes. My CPA, using different software, put it in Schedule CA column z, "Other Income". When I tried this the California number was right, but it also increased my Federal income, so no go. I then tried overriding Line 2 Schedule CA, and this seems to work. Don't know if TT would let me file with this override, though. I realize my post has been specific to California, but it must be a common issue for all states. Any other ideas? Let's limit the discussion to those of us who believe that accrued market discount on Treasuries is non-taxable to states, just like interest, as per Pub 550.