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. 

[LJLauren]

I'm doing taxes in 2025 with Turbo Tax and this is still happening - it's deducting California taxes from EE Bonds. I've deleted the form several times. It keeps coming back.

[RogerD1]

When entering the interest on the 1099-INT screen, be sure that interest from Treasury Bonds and Savings Bonds is being entered in Box 3 and not Box 1.  If you have a 1099-INT from Treasury, there should not be any entry in Box 1 for interest, only box 3.  Once the interest is entered in box 3, it will show up as a subtraction on your California tax return.

[LJLauren]

Yes, that is exactly how I entered it  - 1099-INT $ into box 3. I am currently trying an adjustment on the CA 540, but then it adds in too much.

[RogerD1]

Another possible thing to try here is deleting the state return and then starting over again.  Before restarting your state make sure that you have entered all your information on the Federal page.  Once you do that follow the steps below to delete and restart the state return

For the downloaded version of TurboTax:

1. Click "File" on the top left of the black banner
2. From the dropdown menu, click Remove State Return.
3. Click on the California return under the Return Description, then click Remove
4. On the popup, answer Yes to Are you sure you want to proceed
5. Go to the State Taxes tab
6. Click Start to the left of California to restart the return.

For the online version of TurboTax:

1. On the left side menu, go to State Taxes and click on Your State Returns.
2. Click the trashcan to the far right of California
3. Click on the + Add another State button
4. Select California from the dropdown, then click Continue