US bond interest on schedule K-1(1041) federal and state forms deducted twice from state income

[reteng9]

I have interest from US bonds on a schedule K-1 (1041) federal and K-1 (1041) state tax form. When I enter the interest income from my federal K1 form on my federal tax, TurboTax easy step has a line for "US Bonds (Nontaxable to States) Included in box 1."  When I enter the amount there, it is automatically included on my TurboTax state form under "Modifications Decreasing Federal AGI" as income from obligations of the US Government.  My state tax is lowered as a result of this entry.

My state K1 form indicates the same amount as a negative "fiduciary adjustment."  TurboTax state has a box to check for "fiduciary adjustment (loss) as a beneficiary of an estate or trust," and then prompts for the amount.  When I enter the amount there, TurboTax enters the same amount under the fiduciary adjustment of "Modifications Decreasing Federal AGI" and my state tax is lowered as the same interest is again deducted from my income.

What is the correct way to enter this US bond interest without it getting deducted from state income twice, but still demonstrating that the amounts from the K1 forms are accurately included in both my federal and state tax forms?

[tagteam]

You might try ignoring the Step-by-Step and making the adjustment for your state only.

[VBjC0M2G]

How do I even know if I have U.S. bond interest included in Boxes 1 and 2A on my K-1? If I knew, the amount would be deductible on my state taxes.

[LinaJ2020]

You might need to contact the administrator to find out.  

@VBjC0M2G

[VBjC0M2G]

I discovered that the answer to this one is to go back to the CPA who prepared the trust tax return (1041) and he/she can provide this information. It is not readily apparent on any of the trust tax 1041 forms, documentation, or worksheets..

[tagteam]

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@VBjC0M2G wrote:

I discovered that the answer to this one is to go back to the CPA who prepared the trust tax return (1041) and he/she can provide this information. It is not readily apparent on any of the trust tax 1041 forms, documentation, or worksheets..

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Yes, because you would only find that information on the tax reporting statements the CPA received.

[VBjC0M2G]

I have all of the tax reporting statements that were provided to the CPA, but was still at a loss as to where to look for them.

[reteng9]

Based on input from the provider of the K-1, I entered the bond interest on the federal form only.  It automatically appears as a deduction on the state form under income from obligations of the US government.  The state tax owed or refunded will reflect the correct amount this way without an entry on the fiduciary adjustment line.

Thank you for your reply.

[reteng9]

The K-1 that I received had a note in Box 14 - Other information, that specifically stated the amount of Box 1 that was interest from US government obligations.

@VBjC0M2G 

[TD2023]

I am using TurboTax Business. I entered US Treasury Int (Box 3) in TurboTax step by step. However, the K-1 does not state US Treasury Int anywhere including Box 14 Other Information. None of the Box 14 codes state US Treasury Int.  I can't believe the tax preparer needs to separately provide this information to a beneficiary. 

[tagteam · Accepted solution]

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@TD2023 wrote:

I can't believe the tax preparer needs to separately provide this information to a beneficiary. 

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It is entirely logical since interest from US Treasury obligations is federal taxable.

The interest is only exempt from state taxation and, (a) some states do not levy a state income tax whatsoever, and (b) the total income (including Treasury interest) on some K-1s may not even meet the state threshold for having to file a state return for states that tax individual income.

Regardless, the Treasury interest would, in virtually all cases, be reported on a state iteration of a K-1 (not some separate statement) and reported as such by the beneficiary. An example (for Illinois) is depicted below.

[HopeS]

Although the personal versions of TurboTax provide a template to enter a 1099-OID, TurboTax Business does not. Instead, the form is essentially treated in much the same manner as interest income reported on a 1099-INT.

You can report the information from the 1099-OID on the return using these steps:

1. Click on Federal Taxes > Income
2. In the Interest and Dividends section, click on the Start/Update box next to Interest Income on 1099-INT.
3. On this screen, report the following items from the 1099-OID:
4. Box 1 (OID) and Box 2 (Other Periodic interest) -- add together and enter in Box 1 of 1099-INT.
5. Box 3 (early withdrawal penalty) -- Box 2 of 1099-INT.
6. Box 4 (Fed tax withheld) -- Box 4 of 1099-INT
7. Box 5 (Market discount) - Box 10 of 1099-INT
8. Box 6 (Acquisition premium) - Include in Box 1 of 1099-INT
9. Box 8 (OID on U.S. Treasury obligations) - Box 12 of 1099-INT
10. Box 9 - Investment expense - Enter in the Deductions section of TurboTax:  Federal Taxes > Deductions > Interest expense >Investment interest expense
    Box 10 Bond premium - Box 11 of 1099-INT
11. Box 11 Tax-exempt OID - Box 13 of 1099-INT

@TD2023 

[tagteam · Accepted solution]

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@TD2023 wrote:

......the K-1 does not state US Treasury Int anywhere including Box 14 Other Information. None of the Box 14 codes state US Treasury Int. 

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You only need to be concerned with this issue if you are preparing a state income tax return for the trust or estate. In that event, the US Treasury Interest will be reported on the state's version of the K-1.

@TD2023