Entering Tax Exempt Interest Dividend for my state.

[fpc]

I have a mutual fund that has Exempt Interest Dividends shown in box 12 of a Form 1099-DIV.

I found that 2% of the Dividend is from my state.  so I assume that means that only 2% of the total is tax exempt in my state.

All of the states show income and have a percentage of the income listed from their state.  So I entered the remaining income (98%) as coming from 'More than one state'.  Turbotax tells me that the two entries must equal the total tax exempt amount.

Did I do that correctly?  I think that TurboTax assumes that 100% of the tax exempt dividend is from my state until I indicate that only 2% of it is.

Thank you

[robtm · Accepted solution]

That is correct.  The breakdown would be 2% from your state and 98% from More Than One State. For example if you had $100 total tax-exempt income, $2 would be allocated to your state and $98 to More Than One State for a total of $100.

[fpc]

Thank you.  I appreciate your confirmation and example.

[hbl3973]

fpc,

Yes you almost surely did it correctly.  But do check if your state allows even that 2% to be excluded from state taxation.  One big exception is California where at least 50% of the tax exempt interest has to arise from CA bonds.  In that case, you can just put it all as More Than One State.  (A quick test shows that this CA determination is not automatically made by TurboTax for CA.  Sigh.)

[fpc]

My state is Kansas and I know that TurboTax allowed the 2% allocation for whatever that's worth.

Thank you.  I'll confirm that Kansas does indeed allow it.

[hbl3973]

fpc,

Kansas is OK.  The Vanguard supplemental tax information footnotes at the bottom show only CA, MN, IL, IN having special rules.

[fpc]

Great!!  Thank you for checking.

[rchead037]

As noted in another comment, California exempts dividends and interests from funds only if they hold 50% Federal and California bonds.

The transfer of Federal information to the California return is VERY confusing. Dividends from a California tax exempt mutual fund carry over as "interest"; other Federal interest (Treasuries, government money market funds), come across as "interest" (I think... the California adjustment form shows an amount that I can't find anywhere on the Federal return, but is about what the purely Federal tax exempt interest would be. 

I also got dividends from a tax-managed fund that is NOT 50% state-or-Federal, which was deducted under "dividends" even though the income was listed under "interest". Again, VERY confusing. I reversed these two manually, which TurboTax allowed without comment, but I'm not sure it's correct. We'll see. 

TurboTax: When you transfer an amount from Federal to state return, it would be REALLY useful to have a way to link that amount back to the Federal return. Otherwise, I just have to speculate where the numbers come from :(

[rchead037]

Worse than that, the California determination seems to muddle dividend income that is (or is not) tax-exempt with interest income that is (or is not) tax exempt. 

I had to move the non-exempt amount from multiple-state muni fund dividends to the 'interest' column because the income was put there, not in 'dividends' (I think). TurboTax provides no way at all to figure out where the figures they put into the California return actually come from, unfortunately.

[hbl3973]

rchead037,

Whoa, let's back up a little.  In the federal 1099-DIV entry screen there is a check box to say you have other entries, in particular Box 12, exempt interest dividends.  The next screen asks if a portion of the dividend includes US Government interest.  If the mutual fund satisfies the 50% plus criterion, you check that box and enter US govt. interest on the next screen. The final screen asks you to identify the state or states the exempt interest dividends came from.  Again, if the mutual fund satisfies the 50% plus criterion (and has state govt. and municipal bond income) you enter the various state components.  Otherwise you leave it blank.

[rchead037]

Thanks for the tips. I went back and checked, and the detailed info was not entered in the 1099-B forms involved (they were downloaded, and I answered all interview queries, so I don't know why not). I went ahead and filled the details in, which did not change anything in the CA return.

What confuses me, though, is that amounts transferred to the California tax-exemption page in TT (desktop)  contain numbers that can't be linked back to the Federal forms. TT-CA somehow decides that certain amounts are 'interest' or 'dividends', giving numbers that appear nowhere on the Federal Schedule B worksheets. By deduction, I found that dividends from three mutual funds -- two CA exempt, one with more than 50% exempt dividends, but not qualifying for CA exemption -- were all entered as "Tax exempt interest from California sources". The amount of income from the fund that was NOT CA exempt was then shown under "U.S. Obligations exempt-interest dividends" on the same TT-CA page. That confuses me, though it does not change the calculations. Other exempt interest from Federal bonds is mixed in with the non-exempt portion of mutual fund non-CA exempt income  (as far as I can deduce... several items are involved, and again, none of the amounts on the CA exemption page can be found on the Schedule B worksheets). 

[hbl3973]

rchead037,

I'm not surprised that CA-specific info does not appear on the federal 1099-DIV form (not 1099-B) as there is no box for it there and the mutual fund company cannot definitively know whether a CA address on the form really refers to a CA resident.  You need supplemental information to make the determination of whether any of the dividend was going to be exempt from CA taxation.  This is often given in a supplemental insert with your 1099-DIV form or in the mutual fund's online tax center and provided in terms of percentages.  There are a gazillion funds and ETFs out there and I would not expect TurboTax to have a comprehensive table of that information or even try to acquire one.  But once you have the percentages and have determined if the mutual fund had reached that 50%+ threshold, you multiply Box 12 by each of the two percentages and enter them as I indicated.  They end up appearing on Schedule CA(540) on Line 2 with the US govt interest in column B and the non-CA bond interest in column C.

[rchead037]

Thanks! Yes, that all seems correct. My mutual fund company sends such an insert (or the data is searchable online, though you have to poke about a bit, sometimes). TT does not seem to query very far when you review a downloaded 1099-B or 1099-INT. The presence of potentially tax-exempt income is given from the entry on the 1099, but the state details are indeed something each user has to enter for themselves. I'm not sure if I overlooked the state percentage entry when reviewing 1099s, but I really think TT (Federal) didn't ask.

The tricky part is in the CA interview: that's where numbers appear in the summation of tax-exempt income reported in the Federal return, and not always in a clearly-labeled way, nor can it be easily traced back to the Federal form, which makes it difficult to know what's going on when several funds with different characteristics are involved. Since TT asks about what seems like a million contingencies that don't apply to me (even when I use "you choose", not "ask everything"), I do with they'd go over how they handle tax-exempt income (not just for CA, where the 50% rule adds an extra wrinkle, to be sure), and make it more transparent and obvious to us users, that's all. 

[BobbyC777]

I have a similar issue with entering the exempt-interest & Dividends for my North Carolina state return. I am using Desktop version of Turbo Tax Deluxe 2023. I imported my data from Merrill Lynch. At no point was I given the opportunity to specify what portion of that municipal Interest-Dividend came from North Carolina. In order to do this do I have to "type it in myself" rather than importing it? So the way it's working now is that ALL of that tax exempt-Interest Dividend is showing up as income on my NC return. I want to remove the portion generated from NC exempt investments.  Thanks!

[BobbyC777]

Regarding my question about how to specify what portion of Exempt Int-Div came from North Carolina:

I found how to remove the NC exempt Dividend-Interest from my NC return. In Forms Mode I went to the Form 1099-DIV for the Merrill Lynch data that came in via import. The form says Form 1099-DIV Worksheet. Going down to Box 12 I entered: NC as the resident state ID, then the amount that came from NC. On the next line I entered XX (to indicate all other states) and then the balance of the exempt Div-Int. It then worked its way through correctly to the NC return.