How many miss reducing state taxable income by US Govt interest?

[RunningBum]

I had been doing my son's taxes for years, and this year we decided he should do them on his own. I offered to look it over before he filed. He took me up on it, and I noticed he had not accounted for government interest in some Vanguard mutual funds to reduce his state income.

I walked him through it over text. There was a long pause and he said he had trouble deciphering total dividends per fund with monthly/quarterly dividends on the VG 1099-CONS. It was a little more unclear on his form because he had only held one of the funds for one dividend, so it did not have a bold total under a line. Then he said he really didn't see how he could've recognized this at all without my help.

I walked through it a little more closely on my own and after entering the 1099-DIV numbers the next page said "Tell us if any of these uncommon [emphasis mine] situations apply to you", the first one being "A portion of these dividends is US Government interest". TT has a lot of these type of dialogs, and they are almost "None of these apply to me" for fairly simple returns. This one, however, is not so uncommon, IMO. People who don't have dividends n a taxable account won't encounter this at all, but if you do have dividends, there is a fairly reasonable chance that some are from mutual funds, which very often have at least a little bit of govt interest. In his case one of them was 100%.

Then I looked at his 1099-CONS. The only way to know would be to recognize that the page with heading "Mutual Fund and UIT Supplemental Information" would tell you. On that page is a heading for each fund, and under that in smaller type is "PERCENTAGE OF INCOME FROM US GOVERNMENT SECURITIES". The 1099-CONS information is dense enough and I really can't fault him for missing this.

The mailed 1099s used to have a separate document with the % for each fund, so that was an extra hint. But VG discourages mailed documents, and I'm pretty certain he doesn't get them.

The net reduction of his state taxes was $29. Not a game changer but still something.

I totally understand how he missed this. I wonder how many other people also miss it?

 

[JoeWras]

I think most miss it.

The Turbotax statement "This is not common" is dangerous.

The real problem is it takes separate manual math to split this out, and I think most people have no concept that you have to do that.

 

[PaunchyPirate]

I’ve always thought that TurboTax does not deal with this in an acceptable manner. It is a very common situation for lots of people. At a minimum, they should offer a few probing questions to help the user understand what if it applies to them.

 

[Helen]

Where would I look on my completed tax forms once my CPA completes them?

 

[RunningBum]

Where would I look on my completed tax forms once my CPA completes them?

It would be on your state return, so it's probably different for each state, and of course some states don't have income taxes.

On mine (Virginia), it's a line called "Subtractions" below the Federal AGI. There is a separate schedule for adjustments to the main state form and the line with this on it is "Income (US obligations / securities)", which is transferred to the main state form.

 

[EQMAN]

I did not miss it, but I volenteer for AARP Tax-Aide and it is covered in the training. I have already had a number of people come in to get their taxes done with this. You just have to know what to look for as you review the tax documents. I think the last one I did had a Schwab account and they had the interest exempt in the state clearly listed.

 

[jazz4cash]

When mega-corp transferred me they paid for me to use a CPA for tax prep. I noticed the CPA had missed this and pointed out his error. He didn’t believe me !!!!! He checked around snd sheepishly admitted I was correct. The following year he made the same mistake, so YES I guess it gets missed a lot.

 

[Toocold]

I saw a blog that talked about this, so I made sure that I added this when I was working on TT.
TT was horrible this year for state, so I forgot to check it before final submissions.

I just checked and confirmed that it was reflected in my State taxes, in adjustments. Thanks for the reminder.

This will be a bigger issue this year, as I purchased a bunch of treasuries and interest will be increased so I'll make sure that I remember this next year.

 

[Helen]

It would be on your state return, so it's probably different for each state, and of course some states don't have income taxes.

On mine (Virginia), it's a line called "Subtractions" below the Federal AGI. There is a separate schedule for adjustments to the main state form and the line with this on it is "Income (US obligations / securities)", which is transferred to the main state form.

Thank you so much. I will study my state tax returns to make sure my CPA knows what she is doing.

 

[Ian S]

From what I can see with H&RB, there's a check box for "from US Treasury obligations" separate from the "requires an adjustment (uncommon)" checkbox when inputting the 1099-DIV info. Both are near the bottom of the page and each has a clickable LEARN MORE which, for the former, explains where the info can be found. If you check that box and then click next, it gives you a chance to input the percentage of dividends from US Treasury obligations. The results of that calculation then get carried over to the proper place on state return and added to any 1099-INT Federal obligation interest income.

 

[marko]

I totally understand how he missed this. I wonder how many other people also miss it?

Are you talking about interest from US T Bills? If do, does a US T Bill fund count as well

 

[RunningBum]

Are you talking about interest from US T Bills? If do, does a US T Bill fund count as well

Yes, it should. You'd want to specifically check for your fund but most will. Many bond funds have a decent amount of treasuries so check those too. TIPS are another example of govt interest.

 

[Gumby]

Yes, it should. You'd want to specifically check for your fund but most will. Many bond funds have a decent amount of treasuries so check those too. TIPS are another example of govt interest.

My fund companies always send me information at tax time about what percentage of the prior year distributions were composed of interest on US government obligations, so I can make the adjustment on my state tax return.

 

[JoeWras]

My fund companies always send me information at tax time about what percentage of the prior year distributions were composed of interest on US government obligations, so I can make the adjustment on my state tax return.

Absolutely. But what people miss is they have to do that percentage calculation, or enter it, depending on the tax return. Most people just enter what's on the 1099 and call it done. They are missing the benefit.

 

[Toocold]

For fidelity, I used this. It gets issued every year.

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/GSE-Supplemental-Letter.pdf

 

[badatmath]

I get a little booklet that shows it by quarter. I never understood so ignore it. Plus they wait a good month after sending the 1099 to tell me.

So each quarter has different %, 1st is 9%, 2nd is 12, then year end total is 18%

So can I use 18% for the year and ignore the quarters? I don't get income each quarter - twice a year it declares something.

And take the 18% times total div?

 

[Toocold]

I get a little booklet that shows it by quarter. I never understood so ignore it.


So each quarter has different %, 1st is 9%, 2nd is 12, then year end total is 18%

So can I use 18% for the year and ignore the quarters? I don't get income each quarter.

Correct. For fidelity, you take the dividend amount from your 1099-div statement for the fund and multiply it by the % of us government government securities. You then put this in the appropriate place in TT. It will reduce that amount from income on your state income taxes, as one of your adjustments.

If you have multiple funds, you have to do it multiple times.

 

[VanWinkle]

I have missed it in the past, but not this year as I applied the % per mutual fund to the interest earned. It saved me some state taxes in Illinois.

 

[badatmath]

Correct. For fidelity, you take the dividend amount from your 1099-div statement for the fund and multiply it by the % of us government government securities. You then put this in the appropriate place in TT. It will reduce that amount from income on your state income taxes, as one of your adjustments.

If you have multiple funds, you have to do it multiple times.

Thanks. It looks like I'd have got back an extra $27 but will make a note for this for next year. It was the quarters that confused me really. . . And they act like its uncommon in TT.

Glad you brought this topic up RB

 

[RunningBum]

For fidelity, I used this. It gets issued every year.

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/GSE-Supplemental-Letter.pdf

Fidelity's doc is a little better than Vanguard's. They give an example of how to use it, and also include the fund symbols, which VG does not. It's almost as if VG is trying to disguise this. But really, IMO, the actual dollar amount of govt interest for your dividends should be included in the 1099-DIV. No manual calculation necessary, and no looking up the %s.

 

[badatmath]

Fidelity's doc is a little better than Vanguard's. They give an example of how to use it, and also include the fund symbols, which VG does not. It's almost as if VG is trying to disguise this. But really, IMO, the actual dollar amount of govt interest for your dividends should be included in the 1099-DIV. No manual calculation necessary, and no looking up the %s.

Totally agree! My doc is not very good at all and it really does seem like they want you to ignore it.

 

[SecondCor521]

I think states have laws which vary somewhat on what they exclude and include, which is part of why national companies like Vanguard don't do the math for you for your state. They also probably don't want to appear to provide tax advice. It's also why they provide multiple different values - that way the taxpayer can "do the right thing" for their own state's particular rules.

I'm sure a lot of people miss it, because it does often require reading state tax instruction booklets, doing math, and then entering results into a tax software program that are not found anywhere on the 1099 itself.

It's also easy to miss the opposite situation: Federally tax exempt income (like on line 12 of a 1099-DIV) - usually out-of-state municipal bond funds - which are taxable at the state level. Most people either don't know or forget or choose not to make this adjustment on their state tax returns. It's convenient and appealing (but wrong) to forget because this adjustment can increase state taxes owed. For an example of this type of adjustment, see Idaho Form 39R line A-3.

 

[Telly]

Just curious, as we do not have a state income tax - does the interest obtained on redeeming US Savings Bonds count as federal interest on state tax forms?

 

[Helen]

For fidelity, I used this. It gets issued every year.

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/GSE-Supplemental-Letter.pdf

I would need to give that to my CPA in order for her to compute it correctly?

 

[JoeWras]

It's also easy to miss the opposite situation: Federally tax exempt income (like on line 12 of a 1099-DIV) - usually out-of-state municipal bond funds - which are taxable at the state level. Most people either don't know or forget or choose not to make this adjustment on their state tax returns. It's convenient and appealing (but wrong) to forget because this adjustment can increase state taxes owed. For an example of this type of adjustment, see Idaho Form 39R line A-3.

At least for my state, Turbotax makes this adjustment. And much like the Treasury adjustment, I have to make a manual calculation to figure the amount of this interest from Munis in my state because my own state munis are exempt for taxing. This is another "not common" question on Turbotax.