TurboTax added an interest on its own to my Schedule B, as a result of a 1099-B which reports gain from U.S. Treasury Bonds

[ChacChan]

TurboTax added an interest on its own to my Schedule B, as a result of a 1099-B which reports gain from U.S. Treasury Bonds.

This interest flows into my California tax.

How do I remove this interest (that TurboTax added on its own) from California since Treasury Bonds gain is not taxed in California

[MarilynG1]

Yes, if your 1099-B reported Accrued Market Discount in Box 1f, this automatically is reported on Schedule B as interest.

Market discount is the difference between what you paid for a bond, and the maturity redemption price.  If you bought a $1000 bond for $950, your market discount is $50.  This discount must be included in your income, as interest, either over the period you own the bond, or when it is sold.  In box 1f your broker is reporting the accrued amount of discount over the time you held the bond. TT will show it as interest income on Sch B (look and see if it's on that form), and then subtract the same amount from your gain on the sale (Form 8949), since it's already been reported elsewhere. 

In the California interview, you'll come a to page 'Here's the Income that California Handles Differently'.  Scroll down to Investments > Interest and Dividends Adjustment.  Continue to 'Any Other Adjustments' where you can enter Accrued Market Discount, and the amount.

The adjustment will flow from the Interest & Dividends Adjustment Worksheet, to Schedule CA, Line 2. 

@ChacChan 

[ChacChan]

Dear MarilynG1 (Employee Tax Expert),

Thank you so much for your excellent reply. It works!

The sad thing is that I called TurboTax support team 3 different times. None of these 3 agents, each took a long time to research, know how to solve this problem.  I am flabbergasted at the incompetency of the support team.

Perhaps you can suggest more training, better hire screening, and way to escalate when agents don't know how to find the answer.

Furthermore, please request TurboTax software team whenever it automatically add an interest item when it see a number in Box 1f of 1099-B (Accrued Market Discount), to ask user if this is US government obligations. If yes, the TurboTax simply makes the adjustment automatically in the State tax.

[sorka95032]

Some tax software is doing this. I suspect TT is taking the conservative approach given there seems to be some debate about whether the FTB considers AMD taxable or not. If you take the stand that that since the 1f amount ends up as interest on Schedule B due to a Code D conversion of cap gains to interest, then no state may tax this interest since it was classified as interest by the IRS and derives from federal obligations.

A few users in community forums have pasted written FTB responses that would seem to indicate the FTB does consider this taxable. These response were written by a human without quoting a CA tax code specifically. My guess is that if it were to be spelled out in writing, then it would force an explicit fed/state conflict.

By leaving it ambiguous, many CA tax payers will end up paying taxes on the full AMD reported in 1f vs having this formally resolved which would mean no taxpayers ever overpay as TT would also fix this in software like some other tax programs already have. This isn't a dis on TT. I totally get why they would take this route but it does require that you understand the tax nuances of investing in Treasuries (especially Notes and Bonds). 

What I find more interesting is that the stated reason (by some) for AMD is that the amount under OID is an additional discount that you wouldn't have received if you bought the note/bond from the federal government directly yet 1f includes 100% of the face value minus the paid value, NOT OID minus the paid value, so that reasoning is completely invalid given what actually ends up in 1f. 

You could have bought a bunch of notes/bills on the secondary market above OID but under face value and you'd still end up with face value minus price paid in 1f.