How do I enter interest income from Government Agency Bonds to ensure they are exempt from State/Local taxes?

[teresteve9]

When I imported 1099-INT details, TurboTax did not recognize my specific GSE bonds as state/local tax-exempt.

[baldietax]

just to check, which GSEs are you referring to as GNMA/Fannie/Freddie are not generally state exempt; per Vanguard footnote on 1099-DIV US Gov Obligations which applies here also - "Investments in U.S. government obligations may include the following: Federal Farm Credit Banks, Federal Home Loan Banks, the Student Loan Marketing Association, the Tennessee Valley Authority, the U.S. Treasury Department (bonds, notes, bills, certificates, and savings bonds), and certain other U.S. government obligations. GNMA, FNMA, Freddie Mac, repurchase agreements (including those that involve U.S. government obligations), and certain other securities are generally subject to state and local taxes."

if your bonds are state exempt but your broker has reported them in Box 1 instead of Box 3, I think you have two options:

1. Update the 1099-INT to move this interest from Box 1 to Box 3 (or input as a separate 1099 etc).  Box 3 should flow thru to your state return as a subtraction to income (but you should verify).  Not sure any IRS implications but I assume Box 1/3 adjustments do happen, and do not affect Fed taxes.

2. Put the subtraction into your state tax as a miscellaneous/additional subtraction, most state programs should have this ability, and place for an explanation for the subtraction.  I've seen some comments in the forum that some states preclude e-file if you put in these type of adjustments but don't recall which ones.

Not a CPA/Expert so I can't advise and this is just my 2 cents, but personally I would just fix the 1099-INT in this case, it doesn't affect Fed taxes and is cleaner for state.

If you have any issues with the imported 1099 just delete it and input manually, they do not take long to input.  Also note if you hold individual bonds and have adjustment due to accrued interest paid for purchases on the 1099 then you need to split the 1099 up into separate Box 1/3/8 because TT has no way to specify which box(es) to allocate the accrued to.

Similar recent questions:

https://ttlc.intuit.com/community/taxes/discussion/us-agency-bonds-minnesota/00/3582609

https://ttlc.intuit.com/community/state-taxes/discussion/e-file-minnesota-with-overrides-for-us-trea...

[teresteve9]

Hello baldietax,

Thanks for your prompt and detailed response.

I am familiar with those restrictions with certain Government Agency Bonds, but in my case, these bonds were issued by Federal Farm Credit Banks Funding Corporation and Federal Home Loan Banks, so the interest income of both types of those bonds are state tax exempt. Furthermore, the details of those GSE bond interest payments and bond descriptions are buried in "Details of 1099-INT Transactions" (as part of my Consolidated 1099 Form), information which is NOT reported to the IRS.

So rather than updating my 1099-INT form (where GSE bond interest income is still accurate and taxable on my Federal 1040 tax forms), I chose to manually enter those tax-exempt interest income totals as an "Adjustment/Subtraction" to the applicable "Taxable Interest" line item in my state tax form. This appears to manually force the interest income to become state tax-exempt.

I only wish that TurboTax had the feature to prompt the tax filer with the ability to designate specific interest income from 1099-INT Box 1 (Interest Income) as state tax-exempt, much like Box 8 (Tax-exempt Interest). I will reach out to my broker as well to see if that tax-exempt designation can originate from them, since they are the source of those specific 1099-INT tax records.

[baldietax]

Sounds good.  Yes the treatment seems to vary by broker based on the posts here, I happen to hold some FHLBs at Vanguard that they report as Box 3 so I didn't hit this issue.

[teresteve9]

Interesting, thanks again for all of your insights.

I'll talk to my broker about that as well to see if they can re-designate those interest payments as either Box 3 or Box 8 on my next year's 1099-INT form (vs. Box 1).