I bought Trsy Notes at a discount. My Broker's 1099-B put the Accrued Mkt Discount on 1f, going to Sch B as interest income, but it is not subtracted on MI return. Fix?

[mikehullcpa]

Interest income on Federal obligations are tax exempt in Michigan but TurboTax's MI return does not refect the deduction. What can I do to avoid State taxes on this interest income?

[baldietax]

Been a hot topic - I've had the same issue in VA last year and expect the same this year - the only "fix" I'm aware of is to put this into your state taxes as a manual subtraction with explanation (there should be a screen for that). 

Same topic recently for someone in NY:

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-new-york-tax/00/344188...

Larger thread thread on this topic:

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-trea[product key remov...

[mikehullcpa]

Yes, I had the same problem last year and manually input the adjusted Federal Interest Income amount on the Michigan return.  Although this corrected the Michigan return's tax calculation, the manual override of the number that normally transfers from the Federal return resulted in being unable to e-file the Michigan return even though the TurboTax review reflected NO Federal or Michigan errors.

I will review the other linked posts......thanks for your feedback.  Is there a way to get TurboTax support staff to address this?  I spoke an hour on the phone with my Broker (Morgan Stanley's E*Trade) yesterday, and that representative indicated their 1099 reporting looked right to him.  In my case the interest income on T-bills was correctly shown on their 1099 as Federal government interest income on line 3 and accordingly TurboTax reflected this amount as a subtraction from my Michigan taxable income, but with respect to interest earned on the Treasury Notes (which have a longer maturity) it reflected differently....it went to the Capital Gains & Losses section, TT put the items on Schedule D, then "adjusted" the gain (interest) and moved the income to Schedule B as additional interest income but it is not classified as government interest income and accordingly is not being deducted on the MI return.

BTW, last year, because I could not efile due to the manual override, I printed the Michigan return and filed it by paper in the mail.

[DetroitRick]

I've had the same problem, both in filing 2023 and 2024.  Accrued market discount on Treasury notes - exclusion from Michigan income.  My broker is reporting correctly as well.  This year as last, I can't see any way to get TurboTax to handle this correctly, other than the same override that you mentioned  (Michigan Schedule 1, Line 10).  That is what I did last year.   This will again preclude me from e-filing Michigan.  I'm always on the lookout for a solution, but it's an old problem and I really don't expect TurboTax to ever address it.

[DianeW777]

It depends. If you bought US Treasury notes at a discount in a secondary market, then the interest would not be reduced on your state return. If you purchased the bonds from the US government then you can deduct the interest on your state return.

Accrued market discount from a US Treasury obligation is not deductible on your state return if the effective paid interest is coming from a private party, not the US treasury.   If you buy the bond from the government, you can subtract the interest.   If you buy the bond from a 3rd party, the interest is not deductible. 

@DetroitRick 

[DetroitRick]

Sorry, but this is wrong.  Accrued market discount is excludable from Michigan income.  See Michigan Administrative Bulletin 2020-22.   The fact that this discount is paid to a 3rd party vs. US Treasury is irrevelant under in Michigan tax law.  Especially take note of this text from that bulletin:  "Net losses on the sale or exchange of obligations of the United States government are added back to an individual’s AGI or a fiduciary’s FTI and gains are subtracted".  Those losses and gains on SALE would NEVER be paid to US Treasury, only to the other party to the transaction.  If gains are specifically excluded from Michigan income, AMD would follow.  See also the section titled "Preemption of state tax under federal law"

Also, one might wonder, if accrued market discount is indeed not deductible when "paid to a 3rd party", why TurboTax allows exclusion from Michigan income of those dividends related to US Treasury instruments.  These dividends are, for the most part, originating too from 3rd party transactions by the investing funds.  Conceptually this is very similar.

Finally, tiring of all this discussion, spoke to a Michigan CPA in tax practice who also supported the subtraction.   So......

Bottom line, I presume TurboTax will never fix this.  I will continue to override the Michigan return to get the correct exclusion. 

[baldietax]

@DetroitRick agree, this 3rd party argument is referred to on Internet threads on this topic like the link above, and there are arguments the other way also.  What matters is what's actually written in the state tax code and interpretation of it in specific states which can vary in their language, or settled in the courts (e.g. NC ruled it is not exempt from state tax).

TT just doesn't handle this situation, but I don't interpret that as a clear legal position they've taken after analyzing all the state tax codes.

If in doubt as you have done it's best to consult a CPA who is expert in the state tax code and is accountable for a decision whether to exclude or include it.

[bbjaspan]

Same problem in Georgia, last year and this year.

[NYLou]

Is this true in New York State?   Under this reasoning accrued interest paid for a Treasury bought on the secondary market between interest dates should be excluded from NY State income.  You are buying the right to treasury interest from someone and then receive the interest from the treasury?   Can you site support for your assertion?  Thanks!   

[DavidD66]

@bbjaspan @NYLou 

In my opinion, when you buy a US Government Bond or other obligation at a discount on the secondary market, the interest income attributable to that discount is not interest paid by the federal government.  Therefore, it is not deductible on your state tax return as interest paid by the US Government.  If you want to deduct it on your Georgia tax return, you can do so:  

• Open the Georgia State tax section of your return.  
• On the screen with "Here's the income that Georgia handles differently" scroll down and click Start next to "Other Subtractions from Georgia Income"
• Enter a description and the amount.

Many states, New York included, have a similar option to enter an adjustment as "Other".  Some states, like Michigan only have specific adjustments so you can't reduce your state income for interest reported as taxable. 

[bbjaspan]

Thank you. Actually, I did that last year (no complaint so far) for the first time and this year again. 

[NYLou]

I just spoke to a tax attorney/ CPA in New York.  He says the accrued market discount on a treasury held to maturity is not taxable in New York.  This was after he researched it at his firm.  I feel confident subtracting from income for NY.  

[baldietax]

There was an interesting suggestion in another thread (link below with example) to use the "US Gov Obligations" adjustment on a 1099-DIV to book the AMD to your state subtraction - not putting it in Box 1, just adding to the US Gov Obligations amount.

From some quick testing it seems TT doesn't enforce this amount needs to be less than Box 1 and whatever you put there should hit your state subtraction.  If you don't want to hack an existing 1099-DIV and want to be more transparent you could also try entering a 1099-DIV called "AMD STATE ADJUSTMENT" or something like that, with $0 in Box 1a and the AMD as the US Gov amount (which would appear in your Fed return Schedule B but with $0 impact on Fed income).

Not a CPA/expert so I'm not endorsing or vouching for any side effects.  I already filed with miscellaneous adjustment on my state return so I have not seen it work end to end thru filing.  Passing this idea on for others still stuck.

https://ttlc.intuit.com/community/taxes/discussion/re-accrued-market-discount-on-treasury-bonds/01/3...