You could respond to the TurboTax question by indicating that all of the tax exempt interest is from your own state; but that would be an incorrect answer, unless you actually have a single-state municipal bond fund. (For example, many of the large investment companies in the United States manage bond funds devoted to investing in just the municipal bonds of one single state, like California, New York, Ohio, etc.).
Rather, you should instead respond to the TurboTax question by indicating that your interest comes from "More Than One State." This is so that your interest income is reported correctly on your state tax return. (Please see also the screen-capture image at the bottom of this text; simply click to open).
The tax reasoning is as follows. Municipal bonds (i.e., "tax exempt dividends and interest") are not taxable on the federal level by the IRS, and are also not taxable by the state in which they are issued. However, these otherwise tax-exempt investments are taxable by your state, if they are interest (or dividends when paid through a fund) from bonds from another state. A simple example will demonstrate this.
Let's take Mr. John Doe living in North Carolina. He owns (3) different municipal bonds. One is from the state government of North Carolina, the second is from the City of Chicago (Illinois), and the third is from the state of Florida. When Mr. John Doe files his federal tax return, the interest earned on all (3) bonds is federal income tax exempt. When Mr. John Doe files his North Carolina state resident tax return, only the North Carolina bond interest is state tax exempt. Mr. John Doe actually does have to pay state of North Carolina taxes on his Chicago (Illinois) and Florida bonds, because they are out-of-state municipal interest.
Hopefully that example makes sense, and everyone now understands why it is so important to accurately enter your multi-state bond fund interest into TurboTax.
Note that if you can prove (by looking at your fund company's tax statement on the internet, for example) that some of your $15.67 in interest comes from bond securities issued in your home state, then you can break that out separately when entering the data into TurboTax. When you do this, the amount you input as in-state interest will not be taxed by your state, on your state income tax return. The remainder of your tax exempt interest / dividends will be federal tax exempt, but also will be taxable by your resident state. (This assumes that you live in a state with an income tax; if you don't then it doesn't matter at all how you answer the TurboTax question as to the state source of the income.)
If you have further
questions, encounter any difficulties, or just want to speak with a live tax
expert who can walk you through your TurboTax entries (including the ability to
screen-share with your computer), please feel free to contact us. We
would be happy to help you (and as a paying customer, the call is free to
you). Here is a link where you can create a support ticket and reach us:
https://support.turbotax.intuit.com/contact/
Thank you for asking this important question.
