How do I report interest on cashed EE bonds such that Turbotax recognizes that I am not to pay California state tax?

[MichaelL1]

The savings bonds need to get entered in the Federal interest income section.  The amount will be shown in Box 3-Savings bonds and treasury int.   TurboTax will tax this on the Federal return, and then exempt it from taxes on the state return.  

When you go through the State questions it may ask about it, but it is exempt from State taxes. 

The interest that your savings bonds earn is subject to: federal income tax, but not to state or local income tax. any federal estate, gift, and excise taxes as well as any state estate or inheritance taxes.

[ronmgee]

Despite this answer saying that is exempt, it does NOT show up as a "Subtraction" on the CA (540) Adjustments form, which could result in much higher California taxes.  Is this an error, TurboTax?

[MichaelL1]

@CalCountry

[CalCountry]

@TurboTaxMichaelL1  and  @ronmgee  --
Make sure that tax exempt interest from Box 3 of the 1099-INT received is properly recorded in the 1099-INT entry in TurboTax.

Tested in desktop versions.  The tax exempt interest from Box 3 of the 1099-INT does flow through to Line 2b, in Column B as a subtraction on the Schedule CA(540).

In what  version is this supposed to be happening? Online or Desktop? Version?

[ronmgee]

I just now realized my error and apologize.  My 1099-INT form for Savings Bonds interest has just one box, and I incorrectly entered the amount as "Box 1" in TurboTax.  I now figured out that I needed to click the square box for "My form has more than just Box 1 (this is uncommon)" to reveal the Box 3, Savings Bonds box.  This was a little confusing, since my form had only one actual box, but once I could see the correct place to put the amount, it was all cleared up and showed up in the California return.  Your identification of "Box 3" helped me figure it out.  Thank you for your help!

[CalCountry]

Whew!  Good news.

[MichaelL1]

Thank you @CalCountry for looking at this also.  

[ronmgee]

Sorry for wasting your time!  My only thought is: why do you have to do something extra to see the other potential boxes on the interest form (here that was clicking the box that says, "this is uncommon")?  Couldn't that page just show all the potential boxes?  My Savings Bonds interest forms had only one box (labeled as "3" in very small print).  This was confusing when I saw only one box available in Turbo Tax.  Anyway, just a thought.  Thanks again!

[MichaelL1]

Great suggestion and will pass that on to the programer's,  the Dividend area has the small box also.  If it is kept that the box needs to be more visible

[DIY_Taxes]

This is true for Colorado also. The state tax forms subtract out the initial EE interest but do not account for the change in your tax bracket in effect taxing you on EE interest.

To prove this calculate your taxes with and without your EE bonds. You may need a significant amount of EE interest for this to show up.