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Net tax free interest different on FED and CA state return

Forum|Forum|3 years ago
March 22, 2023
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The same issue on both mine and my daughter's return. When I look at Fed tax free interest on 1040 it does not match what is on the CA state Interest/dividend worksheet. They aren't off by a lot but don'r understand why not exact. We have to split income between two states so we need to understand Bond interest minus bond premium by date to know which state gets what but difficult when our actual records don't match what turbotax is doing. Our records match the federal amounts but not the info transferred to CA.

Best answer by SteamTrain

@KathrynC

Could be a rounding issue

BUT, a couple questions, and possible answer in follow-up.

1) This is only for a 1099-INT right?

and

2) IF you bought a Muni bond in 2022, Did you report any accrued interest you paid to the seller on a follow-up page after the main 1099-INT form?

@KathrynC

Thinking about this some more, (after lunch and a walk) and ignoring any accrued interest you might have paid the seller for Munis you bought in 2022.

I'd bet the main difference is the bond premium amortization in box 13.

TTX software can't know what portion of bond premium amortization to apply to just the CA bonds, and may just assign it proportionally.

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So, subtract any $$ in the original 1099-INT that belong specifically to CA bonds in boxes 8,9 and 13 and put those $$ in a new 1099-INT from the same issuer. Use the top selection with the one state as all CA $$ for that new 1099-INT.

On the former 1099-INT, that has the CA $$ subtracted out of it...you would again use the top selection as $$ coming from one state....(yeah it's not "one") but then scroll to the very bottom of the state list and select "Multiple States" for all of the box 8 $$ on that one.

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Accrued interest you paid the seller for any bonds you bought in 2022 could/might require another1099-INT breakup, depending on what bonds the accrued interest was paid for.

M

MonikaK1

Depending on the types of bonds involved, the Federal amounts may be different from the California amounts.

Federal law requires the interest earned on federal bonds (U.S. obligations) to be included in gross income. California does not tax this interest income. The following are not considered U.S. obligations for California purposes: Federal National Mortgage Association (Fannie Mae); Government National Mortgage Association (Ginnie Mae); or Federal Home Loan Mortgage Corporation (Freddie Mac).

California taxes the interest from non-California state and local bonds.

Regarding bond premium, you are required to amortize the bond premium each year and this will reduce your basis (what you paid). So when the bond matures, your basis will be the face value of the bond.

For tax-exempt and taxable bonds, this adjustment happens automatically when you enter the amount from Box 13 and Box 11 in the 1099-INT section of TurboTax. The adjustment will reduce your amount of reportable tax-exempt interest on Form 1040, line 8b. For taxable bonds, the adjustment will reflect on Schedule B, Part 1.

If adjustments for bond premiums are not reflected on your 1099-INT, you can manually enter the bond premium adjustment in the 1099-INT section of TurboTax. This is also where you can report any accrued interest paid.

Please see the explanation and instructions in this thread for more information.

Please also see IRS Publication 550 for more information.

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K

KathrynCAuthor

My situation is getting more complicated. I imported my 1099 from Schwab and then input the amount of individual Tax-Exempt Bond income by state using the easy step form. The amount being reported on 1040 line 2a matches what I get when I subtract total bond premium from total tax exempt interest. Good up to this point. I compared this to the total tax-exempt on CA Int/Div/Adj worksheet line A. There is a $3 difference. I think this may be how TT handles rounding--I put all my amounts in with dollars and cents. I can understand this I think.

However the amounts on the CA worksheet for CA Tax Exempt interest and non-CA Tax Exempt income don't match anything. I've built a spreadsheet with every Bond, all the bond premium, etc and tried every combination to get to those numbers. The closest I can get (within a few $s) is if I distribute all the bond premium on the same ratio as CA bonds to total Bond versus applying CA Bond Premium to CA interest. It appears to be:

CA Tax-Exempt Int / TTL Tax-Exempt Int = CA Bond Premium / TTL Bond Premium

So my revised questions:

How does TT handle Bond Premium to calculate tax exempt interest at the state level? Using specific numbers or on a ration basis like above?

How does TT handle Rounding?

Are there other worksheets within TT I can reference to see how the interest and bond Premium is being handled?

Thanks