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market discount on matured US bond -- Turbo Tax added it to Schedule B but won't let me correct the US obligations on state return. If using market discount line on federal worksheet to fix the US obligation, Turbo Tax counts the market discount tw

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March 11, 2024
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Best answer by DMarkM1

You are correct. Ultimately you need to have the discount amount taxed at the federal level but identified as US Treasury interest so that your state subtracts it from state taxable income. You have two options.

1. If you already have a form 1099-INT entered in TurboTax with box 1 interest (at least equal to the market discount amount), simply move an amount equal to the market discount you entered in the bond sale topic from box 1 to box 3 in the 1099-Int topic. This keeps the total interest the same on your federal return but identifies the correct amount as US Treasury interest to flow to the state return.

2. If you do not already have box 1 1099-Int entered (or not enough to cover the market discount) then do not enter the market discount in box 1f for the bond sale. Instead create a 1099-Int entry for the brokerage and enter the market discount amount in box 3 using the 1099-INT topic. That interest will then be properly taxed at the federal level but carry to your state return as a subtraction.

DMarkM1Answer

You are correct. Ultimately you need to have the discount amount taxed at the federal level but identified as US Treasury interest so that your state subtracts it from state taxable income. You have two options.

1. If you already have a form 1099-INT entered in TurboTax with box 1 interest (at least equal to the market discount amount), simply move an amount equal to the market discount you entered in the bond sale topic from box 1 to box 3 in the 1099-Int topic. This keeps the total interest the same on your federal return but identifies the correct amount as US Treasury interest to flow to the state return.

2. If you do not already have box 1 1099-Int entered (or not enough to cover the market discount) then do not enter the market discount in box 1f for the bond sale. Instead create a 1099-Int entry for the brokerage and enter the market discount amount in box 3 using the 1099-INT topic. That interest will then be properly taxed at the federal level but carry to your state return as a subtraction.

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G

ganowAuthor

Thank you DMark M1

My problem falls right between your answers. The market discount of the matured bond is properly adjusted on Schedule D and the Capital g/I adjustment worksheet properly assigns it to Schedule B.

On Schedule B the broker's entry matches the broker's 1099 INT and does not include the amount of the market discount. On Schedule B there is an additional line with the amount of the market discount but not identified with the broker; it is just labeled with the name of the Treasury bond and the words "market discount". Thus, the total interest on Schedule B is correct and includes all interest which is federally taxable. That extra line will not permit me to edit it in any way to categorize it as nontaxable in my State.

When I create an additional 1099 for the broker in the amount of the market discount and mark it as a US obligation, the result is paying the feds twice. Once I do that, I can remove my newly created 1099 but not the additional bond line. Help!

DMarkM1

You will want to use option 2. Go back to the bond sale and edit your entries. Remove the market discount amount from box 1f. Instead of putting the discount amount there you should create the "Mock" 1099-INT for the brokerage and put the market discount amount in box 3. The result will be one entry for the discount amount on schedule B that is taxed at the federal level but not taxed at the state level.

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