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US Treasury interest from Bonds, notes etc...are shown in box 3 of the 1099-INT, and that is handled automatically by the software.
US backed "Agency" bonds and notes (TVA, Fed Home Loan...etc) ?
Yeah, thsoe $$ show in box 1 and no easy way to deal with them directly.
Check your State software Q&A for an "Adjustment" area . A CA taxpayer found that he could enter his US "Agency" $$ in the CA Q&A menu to get those $$ subtracted from state income. But it may depend on the individual state software set you are using, as to whether a way is provided to subtract it. For my NC software, I can only get "Agency" $$ taken out by a direct entry using "Forms Mode" on the Desktop software.
Prior versions of Turbotax Deluxe Maryland allowed the user to enter the amount of US Government interest. For the past two years, the Maryland interview displays the values entered during the Federal interview and locks out adjustments. The value on the Maryland form view is locked out from overrides. There is form 502SU which supplied the Maryland US Gov interest deduction to the Maryland main form 502, which does allow an override but does not allow you to enter details.
In the Federal interview, there is a question in the interest entry section asking 'is some of the interest from US obligations'. If you check that, you can select the state (i.e. Maryland). However, when you do this, Turbotax provides no way of entering the correct amount. Instead, it uses the total interest from that Broker as if it is all US government interest on the state form. That significantly overstates the US government interest on the Maryland form and would generate a tax deduction that I'm not entitled to. As stated above, the state interview does not allow that amount to be modified. Ironically, the state interview has an edit button next to the US Gov Interest amount. When pressed, it tells you the source (Federal interview) and that it is not modifiable.
The only solution I've found is to override the value on the 502SU form. This form is listed by the state software in the forms being used by my return. I had to know of the form and open it manually. That works but can be a problem if one receives amended 1099s and forgets about the 'hidden' override on a Maryland 502SU form.
My only concern is that the state of Maryland may question a discrepancy between my broker, which did not include US Gov agency income on the 1099-B, and the amount I report on the Maryland form.
This is a serious flaw in the Turbotax software. It probably only impacts a small population of users. It should be fixed by allowing the user to adjust the US Gov Interest value on the Maryland interview. That is the way Turbotax the software worked in 2021.
It is unfortunate that the broker, Fidelity, does not correctly provide the amount on the 1099-B based on the laws in the state where the investor resides.
I don't disagree with you, for the most part. TTX really should provide an easier way to indicate US Agency $$ from box 1 for direct integration into each state's tax forms as state income deductions.
The easiest way to deal with them, legally, would be for the IRS and the States, to agree to put those $$ from "Agency" bonds in box 3 of the 1099-INT. That only works if all the income-taxing states agree that they do not tax dividends/interest from those US agencies. I just don't know if all states exempt all US Agency interest...none...or just a certain subset. If they do agree, the brokerages could then reassign the $$ to box 3 for whichever Agencies all the states agree to.
Need someone internally at the IRS to address this with the states....not sure how that can be started up.
Guess I need to go to the IRS site and see if they have a taxpayer comment submission area. IF they do, we all need to poke at them to change the handling of where the $$ are reported on the 1099-INT.....with the various state's agreement of course.
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