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Question

Oregon: deducting federal agency bond interest

Forum|Forum|6 years ago
February 20, 2020
3 replies
0 views

I've run into the following problem year after year with TurboTax (desktop version). I would like to be able to efile, but of course cannot do this with any overrides. But the ONLY way I've found to complete my Oregon state return is by using an override. If anyone can help, that would be great. I would definitely like to be able to efile instead of mailing (USPS lost my return last year even though it was sent certified).

Here is the problem: I own several U.S. government backed federal agency bonds that are state tax-exempt (TVA, Fed. Home, Fed. Farm Credit). Interest from these appears in my brokerage 1099-INT (line 1). There is no way that I've found in TT to designate that this interest is state tax-exempt in Oregon (there are options to do this for a few other states, but not Oregon).

I therefore am forced to override the amount indicated under Oregon's ASC form, Subtractions, and insert there the amount of interest from these state tax-exempt federal agency bonds. And when I do this, I then cannot efile my return.

Here is the tax status of these bonds, as shown by FINRA:

Thanks for any help!

DawnC

Employee

There is a box for Local Government Bond Interest under Other Subtractions on the Oregon return that does not require an override.

Interest and dividends on U.S. bonds and notes (Subtraction code 315). A subtraction is available for interest or dividends from U.S. bonds and notes included in federal income.

Local government bond interest (Subtraction code 317). A subtraction is available for interest or dividends on obligations of counties, cities, districts, ports, or other public or municipal corporations or political subdivisions of Oregon to the extent included in federal income.

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Owl5550Author

Hi Dawn C -

Thank you for your prompt reply. I've seen the box you mentioned, but I do not believe it could be considered appropriate since federal agency bond interest is not "local government bond interest." Federal agency bond interest (such as TVA) needs to be identified as interest from a U.S. government directly backed obligation, and is not "local government bond interest."

When you said that "a subtraction is available for interest or dividends on obligations of counties, cities, districts, ports, or other public or municipal corporations or political subdivisions of Oregon," this doesn't apply to nationwide federal, non-local, bonds issued by federal agencies like TVA. I have therefore needed to make use of code 315 for interest for federal agency bond interest -- and there is no way (that I know of) to do this in TT without resorting to an override.

Please do reply if you have reliable information otherwise. I appreciate your attempt to help!

rpdo24

You mentioned that TT will not allow you to efile if you've made any overrides on your return. On my 2024 return I was faced with the same dilema where to report agency interest on my Oregon return. I opted to do an override and post it on OR-ASC Section B subtractions, Code 315. The override did not prevent me from e-filing, which I was able to do successfully yesterday. I realize your post is 5 years old so I'm guessing that TT must have modified their software to allow overrides to be e-filed.

I do have a concern: My broker (Schwab) includes agency interest in box 1 and I'm expecting Oregon Dept. of Revenue to question my return because it isn't reported separately on my federal return. Agency bonds are a huge market, it is mind boggling that brokers are not required to report agency income separately on a 1099-INT. I'll be on the phone tomorrow with the Schwab Tax Dept demanding an explanation and expecting to be brushed off lol.

GreenApple123

Hello Owl,

Just found your question regarding deducting federal agency bond interest at state level. I have the same issue at PA. Your post was 3 years ago, just wonder if you have found a way to resolve this now?

Your help/guide will be highly appreciated!

SteamTrain

Employee

@GreenApple123

I suspect TTX doesn't include an easy way to do this for many states.

For NC, I've always had to enter TVA & Home loan $$ on the NC deductions "worksheet", the NC Schedule S...and always in Forms Mode. The worksheet does allow me to make additional entries without overrides.

For PA, you may have to look for a worksheet where such deductions are entered, to see if the PA form allows such extra entries.

_________________

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

mgfrobozz

Employee

In order to deduct interest from federal agency bonds in the Oregon tax return, you must declare that a portion of dividends you received is "interest on U.S. government obligations". That declaration is made when you are in the federal taxes section of the interview, and it's easy to miss:

Click the "Show Topic List" button at the top of the screen
In section "2. Federal Taxes", in the "Interest and Dividend Income" section, find the dividend that you need to declare. (For my taxes, it was "Form 1099-DIV (VANGUARD MARKETING CORP)"). Click on that dividend
You should be in a page titled "Let's get the details from your 1099-DIV or brokerage statement". Click the button at the bottom right to continue to the next page
Keep clicking to the next page until you reach titled "Tell us if any of these uncommon situations apply to you". In that page, check the checkbox titled "A portion of these dividends is U.S. Government interest"

Once you do that, you will find that the values has also been added to your OR-ASC form as a subtraction.

Repeat the process above for any ordinary (non-qualified) dividends. For Vanguard, these are listed in the "Detail for Dividends and Distributions" as "Nonqualified dividend" and/or "Section 199A dividend".

SteamTrain

Employee

@mgfrobozz

Your solution is the normal way these Agency $$ are entered when received as "dividends" in box 1a of a 1099-DIV form...usually as a part of dividends received from a Mutual Fund.

BUT

All these issues in the above discussion are about US Agency bond $$ issued and listed in box 1 of a 1099-INT form.....received from individual bonds the person owns. And there is no similar follow-up question for the 1099-INT forms. (I just rechecked the software, in case they've adjusted the 1099-INT interview in the past few months....they haven't).

Normally, US Treasury $$ will be listed in box 3 of a 1099-INT and will be handled appropriately by the state software as not being state taxed.......but US "Agency" $$ (TVA, FHLB, etc) will show up in box 1 of the 1099-INT.

Would be nice if the IRS would get together with the various states with an income tax, and see if they treat any, or all of these special US Agency $$ the same, and if so, direct the brokerages to start including those $$ in box 3 of the 1099-INT. Then we all wouldn't be struggling with this somewhat subtle issue.

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

mgfrobozz

Employee

Thanks, SteamTrain ... good catch

For interest on U.S. government obligations, after adding an entry for the interest, in the page "Tell us if any of these uncommon situations apply", there is a check box "Our state doesn't tax all of this interest"). However, it lists only 6 states, and not Oregon. This situation is definitely not uncommon, and TurboTax should change their handling for it. In the 1099-INT, box 3 is "Interest on U.S. Savings Bonds and Treasury obligations", and if that is non-zero, then they should automatically set the check-box for state exemption, for all states.

'Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes'
https://www.irs.gov/taxtopics/tc403

'Interest and dividend income on obligations of the federal government which are exempt from state income taxation but not from federal income taxation shall be subtracted from federal taxable income in arriving at Oregon taxable income'
https://oregon.public.law/rules/oar_150-316-0509
(The intuit server is getting cute with that url ... in the following url, change the lower-case z-s to hyphens:
https://oregon.public.law/rules/oar_150z316z0509)