Do I have to calculate what portion of dividends are US Government interest?

[incidentally]

Hi everyone! 

I received a 1099-DIV form, and after entering it into TurboTax, I'm asked to check a box if "A portion of these dividends is US Government interest." I've been digging into the TT forums trying to figure out how to determine 1) if any of my dividends meet this criteria, and 2) if so, how the heck to find the exact amount of US Government interest to then enter into the following screen. This whole ordeal honestly seems like a huge headache that — at least for me personally — is not worth it. 

So this is my question: do I have to tell the IRS what portion of my dividends represent interest from US Government obligations, or can I just skip this and not check the box? I'm happy to pay a little more in taxes if I don't have to deal with this, I just don't want to get in trouble with the IRS.

Thanks so much!

[robtm · Accepted solution]

The IRS doesn't care if your income is from government bonds or not. The question is asked because states do not tax government bonds. You can just say that one of is from government bonds. Unless it is a government bond mutual fund not much of a funds dividend is from government obligations. If you don't want to deal with the hassle then just ignore it and continue.

[Opus 17]

It depends on what you invested it, if you can even get that information.  For example, if you live in NY, NY will not tax NY state bonds (but will tax other state bonds).  This is easy to figure out if you directly purchase NY bonds on the bond market.  But if you buy a mutual fund that invests in bonds, it might be that only a small percentage of your dividends is from your home state.  If the bond company can tell you where the dividends come from, you can put that in Turbotax and save the state tax on that tiny portion of the dividends.  But it may be impossible for the company to even tell you. 

[baldietax]

as others have put it this is an opportunity to reduce your state taxes it will not affect your Fed taxes

if you invested in Money Market funds then more than likely anywhere between 50-100% of the dividend paid by that fund may have been US Gov obligation.  Equity funds etc will probably be much smaller if anything.  CA, CT and NY have requirements that the fund have at least 50% to qualify for this exemption - see notes in docs below.

This information is readily searchable and available from the fund provider websites usually they have a tax page with "supplemental tax information" or "tax letter" for 2024, e.g. Vanguard and Fidelity here (and brokerages with their own funds may also include these %s on your 1099 consolidated statement if you had any holdings)

https://investor.vanguard.com/content/dam/retail/publicsite/en/documents/taxes/USGO_012025.pdf

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/TY24GSESupplementalLetter.p...

[incidentally]

Thank you for the help with this!

[incidentally]

Thanks so much!

[incidentally]

Appreciate the help with this!

[rkagrawala]

Hi! I know your question was already answered, but I also just realized this...and that I've been overpaying my state taxes for at least the past four years! 🙄

Sorry for the lengthy answer but I'm hoping this will help others like us who missed this, as this is one of the few areas TurboTax maybe isn't quite so helpful. 

Short answer: Yes, when you check that box, it will ask you to enter a value. 
Yes unfortunately you will have to hand-calculate it.

Yes unfortunately in order to hand-calculate it you will have to look closely at your 1099-DIV, and will also need to find that percentage. If it's not already shown somewhere on the 1099-DIV, your broker may have a separate publication with a table of the %'s available.

For those who need to get back to that area in TT, go to "Federal Taxes" --> "Wages & Income" --> Interest and Dividends" --> "Dividends on 1099-DIV", and hit the button. It will take you to your 1099-DIV info (whether imported or hand-entered), and then hit "Edit".  
Scroll to the bottom of the next screen and hit "Continue". Then the checkbox comes up. Click to select the checkbox and Continue.
That's when it will ask you to "Enter the amount of dividends reported on this 1099-DIV from [REDACTED] that represents interest from U.S. Government obligations."

Then get ready to calcumulate. 😂
Note that the % for each fund is different, so you'd have to hand-calculate the amount for each dividend-paying fund, and then add all of those amounts together.  (Excel or Google Sheets might be helpful for this; I just used my phone's calculator.)
To make it easier on myself, I only calculated the amounts where I expected a significant value. 
I determined (a bit ad-hoc) by looking for either big dollar amounts, or big percentages. (How big? Meh.)
Where neither of these were true, I simply disregarded them. 

But yes depending on what securities paid ordinary dividends, how much they paid, and what the %'s are, it could be well worth doing these calculations and then entering the final value in this field.

Doing so saved me nearly $300 on my state taxes for 2024. 

Now I'm kicking myself for not doing this the past several years; I am definitely going to try to amend my state returns back to tax year 2020. 

[DawnC]

Good idea, @rkagrawala ....  the time to file an amendment for 2021 is nearing the deadline.   How do I amend my state tax return?