TurboTax should automatically identify the amount in Box 3 as an item to be subtracted from state income, when you enter interest from U.S. Treasury securities in Box 3 of Form 1099-INT. You may not see this immediately in the refund meter if it is showing.
When you complete the state interview in TurboTax, you are asked a series of questions about any items that need to be treated differently or allocated among different states, and you should see the Box 3 amount listed as a subtraction from state income. You shouldn't have to do anything unless you need to allocate the subtraction amount among different states.
Once you go through your state interviews, the savings bond interest should not appear in state taxable income.
For California returns, look at Schedule CA, Line 2, Taxable Interest, to find where the bond interest is subtracted. If you are using TurboTax Online, you can preview your return before filing to find out how your taxes were calculated. See here for details.
Typically, interest from corporate bonds will be in Box 1, interest from U.S. Treasuries will be in Box 3, and tax-exempt interest from muni bonds will be in Box 8. Even if you don't have to pay income tax on the interest, you still need to include it on your Federal tax return.
- Box 1 of the 1099-INT reports all taxable interest you receive, such as your earnings from a savings account.
- Box 2 reports interest penalties you were charged for withdrawing money from an account before the maturity date.
- Box 3 reports interest earned on U.S. savings bonds or Treasury notes, bills or bonds. Some of this may be tax-exempt.
- Box 4 reports any federal tax withheld on your interest income by the payer.
- Box 8 reports tax-exempt interest and relates to interest-bearing investments you hold with state and local governments, such as municipal bonds.
If you need to enter adjustments to interest income reported on Form 1099-INT, look for the follow-up screen "Do any of these uncommon situations apply?" and choose "I need to adjust the interest reported on my form". On the following screen, enter any subtraction and select a reason for the adjustment from the drop-down menu.
When you complete a state interview in TurboTax, you are asked a series of questions about any items that need to be treated differently or allocated among different states, and you should see the Box 3 amount listed as a subtraction from state income. You don't have to do anything unless you need to allocate the subtraction amount among different states.
See this TurboTax tips article and this one on investment bonds for more information.
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