Why does my tax owed increase when I input the tax-exempt interest from the 1099-int

[scarlson48]

when I add the $1250 tax-exempt interest from the 1099 INT to box 8 my Fed tax owed increases to 973 from 823 and my state tax also increases

[SteamTrain · Accepted solution]

any or all of these

1) Your state taxes the Tax-Exempt interest...unless it was issued from bonds issued by you own state.  IF you did buy your own state's bonds, there is a follow-up question about what state issued the bonds that produced the $$ in box 8.  You select "More than one state" if none of them were your state, or check a box and break out just your own state's amount if it's mixed.

2)  IF you are getting SS, the amount of SS that is taxed uses a calculation that INCLUDES tax-exempt income.

3)  For the Health care mandate...family income includes tax-exempt $ to determine the Premium credit allowed.

[bbickley]

The answer provided the state increase in tax if interest was not issued by a bond in the state of the taxpayer but did not address why the federal taxes increased for tax exempt interest entered in box #8. Should federal taxes increase for tax exempt interest entered in box 8?