2020 Tax: How to Report Muni Bond Income?

[Amethyst]

I'm using an H&R tax program and have come across a matter where the "Help" function has failed me.

We own some Maryland municipal bond fund shares, which generate interest-dividends that are exempt from Federal tax.

The 1099-DIV for these funds shows Ordinary Dividends (very small), Tax-Exempt Interest Dividends (the bulk), and Special Private Activity Bond Fund Interest Dividends (modest amount).

After entering these and hitting "finish," the software asks for "state-exempt dividends," the amount that is tax-exempt in the state of residence. Naturally this would be the whole amount in Florida, which has no income tax. But the 1099 doesn't have a box for this amount.

How do I know what to tell the software? I don't know if the Special Private Activity dividends are a subset of the other types of dividends, or are in addition to them.

Thanks for your insights.

 

[MBAustin]

I'm not a CPA but I would think that "state-exempt dividends" means "exempt for the state where you live" so assuming you don't also have to file a MD return I can't see how it would be relevant.

 

[Amethyst]

I bet it doesn't matter if I answer the question or not. I tried it both ways, and it does not affect the result.

I'm not a CPA but I would think that "state-exempt dividends" means "exempt for the state where you live" so assuming you don't also have to file a MD return I can't see how it would be relevant.

 

[Amethyst]

Well, Florida doesn't tax any income (yet! and we are all hoping the pandemic doesn't force the legislature to do something to raise revenue).

It looks like Box 12 (the private bond activity interest) is subsumed under Box 11 (the total tax-exempt interest) so that may be all I need to worry about.

I’ve lived in two states where muni bond income is mostly taxable, and I’ve always done the calc myself using this. You didn’t say what fund you own, so I don’t know if this is useful for you or not. I assume there’s a similar doc for whatever you own.

https://personal.vanguard.com/pdf/INBST_012021.pdf

 

[gauss]

I just did a variation off my main return with HR Block software and added a 1099-DIv with Box 11 "exempt interest dividends" set to $0, $1000, $50,000 and $100,000.

My Federal refund held constant for the first 3 of these 4 tests -- which is mostly would I would expect. The changing refund with the $100,000 figure started to make sense since some parts of the tax code (perhaps AMT) treat tax-exempt interest differently.

As far as the state portion goes, the general correct answer is probably to enter the subset of those dividends that are from the state where you reside, so that they would be excluded from any state income tax.

If your state doesn't have an income tax, the point is probably moot and nothing could also be entered I would think.

FWIW - I e-filed with HR Block software today and received my Federal acceptance and submission number within 10 minutes. I am still waiting on my state to accept their return however.

-gauss

 

[scrabbler1]

For 8 years, I had to file a non-resident return for the state I worked in as well as my home state's resident form. On each state's form, I had to adjust the dividend income from my national muni bond fund to exclude each state's % of the entire income. The brokerage company always did this calculation for my home state's %, but I then had to ask them for (or, later find on line) the other state's % and use that adjusted income in the Column A amount (the one for all-sources income). It was a minor PITA and a welcome elimination when I ERed!

 

[Amethyst]

Over a certain AGI, there's a 3.8% surtax on investment income, including tax-exempt.

some parts of the tax code (perhaps AMT) treat tax-exempt interest differently.



-gauss

 

[jazz4cash]

I bet it doesn't matter if I answer the question or not. I tried it both ways, and it does not affect the result.

This is what I would’ve expected. In our case we have some non home state munis and the detail (% of income by state issuer) is listed apart from the 1099 info from Fido. I think the software asks for details that may not be used until the state return is calculated.

 

[target2019]

What the tax software should be trying to accomplish is to determine the percentage of tax-exempt income earned in your state vs. all other states. For example VNJTX is all attributable to bond activity in NJ. In that case I put in 100% and NJ (I live there). To contrast, for USTEX I use 5% NJ (got that off the USAA/VCM sheet published for 2020) and 95% XX (stands for all other states). This is how TurboTax handles things. So the percentage you enter for any state comes from a summary sheet published by the fund company.

If you have a Maryland bond fund, 100% is attributable to Maryland activity (hopefully). But I suppose that could be something other than 100%. Enter 100% and MD. You will not see any change for FED. If you open MD state tax form you'll see 100% flow into the form, with 100% tax-exempt for MD. When you open FL form you'll see 100% appear as taxable for FL, but with no income tax for FL it won't make a difference in tax owed.

I have TurboTax, and can't verify any of this in other tax software programs. When confused or just want to know more, I Google the concept and add TurboTax forum in the search. You can also do the search from within TurboTax. I imagine H&R has something similar, but maybe not.

 

[gauss]

Over a certain AGI, there's a 3.8% surtax on investment income, including tax-exempt.

Thanks - Good point - that is probably it.

I should be aware of this in that I have been paying it each year recently as part of my "Roth convert up through 24% bracket" strategy"

-gauss

 

[JoeWras]

For NC, I use the sheets that Vanguard sends along with the 1099 that shows the percentage for each state. There appears to be a deleted post above that has a reference to the sheet I speak of. Then I have to calculate the specific state (NC) amount manually.

That's the number entered into TT for the state portion.

TT has gotten better about this. In the past you basically had to split out another 1099, but in recent years, they added the question.

It doesn't matter much anymore in my case. I've sold my tax exempt fund, and NC's percentage is in the weeds for munis (less than 1%). I appears NY and CA have sucked up the Muni market.

 

[Amethyst]

That makes sense. It doesn't speak well, though, for the developers. I was astonished that there isn't a block for "Does your state have an income tax?" since there are several states, besides Florida, which do not.

I think the software asks for details that may not be used until the state return is calculated.

 

[Amethyst]

MD muni bonds are paying around 2.4%.

It would be fairly painless to sell, since capital gains are small, but it's too easy to just take the dividends and reinvest in an index fund.

It doesn't matter much anymore in my case. I've sold my tax exempt fund, and NC's percentage is in the weeds for munis (less than 1%). I appears NY and CA have sucked up the Muni market.

 

[JoeWras]

MD muni bonds are paying around 2.4%.

It would be fairly painless to sell, since capital gains are small, but it's too easy to just take the dividends and reinvest in an index fund.

What I meant was for the Vanguard funds, the percentage of NC Munis are less than 1% of their portfolio. So holding tax exempt Vanguard funds doesn't help in my state situation since most funds are out of state and taxable in NC.

And yes, to your other comment: it should ask if your state has income tax so it can skip this question. It does not pertain to you in FL.