Tax-exempt 1099-INT, 1099-DIV, TurboTax, Vanguard

[richard]

Would it matter for TurboTax if you enter tax-exempt interest as if it were reported on a 1099-INT even though it's actually reported on a 1099-DIV?

According to Vanguard's web site "Important change for mutual fund clients: Beginning with the 2012 tax year, you'll no longer receive Form 1099-INT.

Interest dividends (including specified private-activity bond interest) from tax-exempt bond funds will be reported on Form 1099-DIV. For brokerage accounts, Form 1099-INT will still report taxable and tax-exempt interest income from individual bonds and other interest-bearing investments." [Search for "Find out when your tax forms will be available". I had to log in to see this]

TurboTax does a better job of dealing with tax-exempt interest on a 1099-INT than on a 1099-DIV. For a 1099-INT, if the interest is from more than one state, it lets you specify how much is from each state (this is necessary for some if not all state tax returns, otherwise you may have to find workarounds to distinguish interest exempt from state taxes from non-exempt interest). Also, it does not show the fund or interest on Schedule B. For a 1099-DIV, it does not let you specify how much is from each state and lists the fund with a zero amount on Schedule B. TurboTax totals the tax exempt interest to the relevant line on 1040 whichever form you use.

I can't find any other difference between how TT deals with tax-exempt interest on a 1099-DIV compared to a 1099-INT, but am concerned I'm missing something.

1099-INTs and 1099-DIVs are not yet available, but your Vanguard account should list 2012 distributions.

[HueyLD]

Would it matter for TurboTax if you enter tax-exempt interest as if it were reported on a 1099-INT even though it's actually reported on a 1099-DIV?

Yes it does matter for both TT and IRS. Both tax-exempt interest and tax-exempt dividend are reported on F1040 line 8b. But the dividend input screen in TT is not designed to handle multistate sources of income. There is an "other adjustment" entry, but it deducts the "entire" amount of tax-exempt dividend from F1040 line 9a. I couldn't find a way to tell TT what % of the TE dividends belongs to my state for state income tax exemption. I think this is going to be a problem unless TT redesigns their program.

According to Vanguard's web site "Important change for mutual fund clients: Beginning with the 2012 tax year, you'll no longer receive Form 1099-INT. Interest dividends (including specified private-activity bond interest) from tax-exempt bond funds will be reported on Form 1099-DIV. For brokerage accounts, Form 1099-INT will still report taxable and tax-exempt interest income from individual bonds and other interest-bearing investments." [Search for "Find out when your tax forms will be available". I had to log in to see this]

I have no idea why VG decided to change their reporting method. I am not aware of any regulatory change to such reporting requirements.

TurboTax does a better job of dealing with tax-exempt interest on a 1099-INT than on a 1099-DIV. For a 1099-INT, if the interest is from more than one state, it lets you specify how much is from each state (this is necessary for some if not all state tax returns, otherwise you may have to find workarounds to distinguish interest exempt from state taxes from non-exempt interest). Also, it does not show the fund or interest on Schedule B. For a 1099-DIV, it does not let you specify how much is from each state and lists the fund with a zero amount on Schedule B. TurboTax totals the tax exempt interest to the relevant line on 1040 whichever form you use.

I can't find any other difference between how TT deals with tax-exempt interest on a 1099-DIV compared to a 1099-INT, but am concerned I'm missing something.

See my statement above. My state's tax program is not yet available on TT because the state has not released its 2013 tax forms. Unless TT reprograms its dividend input screens, we may have to figure out a workaround for in-state tax-exempt dividends.

I thought of treating 1099-DIV tax-exempt dividends as 1099-INT tax-exempt interest and use the interest screen to input such data. However, doing so will really screw up the IRS' matching program and risk getting a love letter from the IRS.

What a pain!!

[richard]

Would it matter for TurboTax if you enter tax-exempt interest as if it were reported on a 1099-INT even though it's actually reported on a 1099-DIV?

Yes it does matter for both TT and IRS. Both tax-exempt interest and tax-exempt dividend are reported on F1040 line 8b. But the dividend input screen in TT is not designed to handle multistate sources of income. There is an "other adjustment" entry, but it deducts the "entire" amount of tax-exempt dividend from F1040 line 9a. I couldn't find a way to tell TT what % of the TE dividends belongs to my state for state income tax exemption. I think this is going to be a problem unless TT redesigns their program.
[snip]
I thought of treating 1099-DIV tax-exempt dividends as 1099-INT tax-exempt interest and use the interest screen to input such data. However, doing so will really screw up the IRS' matching program and risk getting a love letter from the IRS.

That's the entry method I'm asking about. The question is whether it really will screw up the matching program.

For 2011, when Vanguard reported on 1099-INT, the only place the tax-exempt interest/dividend showed up was on 1040 line 8b. It did not include a listing of fund names and zero interest amounts.

This year, if I enter on 1099-DIV, I get funds listed on Schedule B with zero amounts. I'm not sure if that is the right treatment, but even if it is, will the IRS flag you for not including a line with a fund name and a zero amount of dividends? If so, why would the IRS do that for dividend items when it didn't do so for interest items?

It's possible the IRS matching only looks at totals, in which case entries of zero wouldn't matter.

[sscritic]

The IRS changed the reporting requirements. TT is wrong. Maybe there will be an update.

What’s New
Exempt-interest dividends. Exempt-interest dividends from a mutual fund or other regulated investment company (RIC) are no longer reported on Form 1099-INT. Those amounts will now be reported on Form 1099-DIV, Dividends and Distributions.

I always encourage people to read the instructions. Vanguard did. TT should take a hint.

[HueyLD]

Sscritic,

Thank you for the update. Now you just need to tell Intuit to get off their butt.

[richard]

I always encourage people to read the instructions. Vanguard did. TT should take a hint.

Do you see any thing in the instructions that covers how to report a 1099-DIV with zero taxable dividends/interest and with non-zero tax-exempt interest - must it be included on Schedule B showing $0 or may it be omitted?

If it may be omitted, it would seem you could enter the information to TT as if it were reported on a 1099-INT

The instructions for both interest and dividends includes "List each payer’s name and show the amount" http://www.irs.gov/pub/irs-pdf/f1040sb.pdf I have not had a problem in previous years not listing a payer's name when the reportable amount was zero.

[pshonore]

I'm not sure there's a problem here. If you look at 2011 - 1099 Div, you will see Boxes 1-9; if you look at the 2012 version, there are Boxes 1-12. Box 10 is labeled "Exempt Interest Dividend", Box 11 deals with Private Activity bonds info and Box 12 is the State Code. Heres the TT explanation

Use Form 1099-DIV Worksheet to enter exempt-interest dividends, which are income dividends paid to you from a mutual fund or other regulated investment company earned on federally tax-exempt securities, such as state municipal bonds.

Exempt-interest dividends will NOT be listed on Schedule B, but will be included on Form 1040, line 8b as tax-exempt interest.

Private activity bond amount included in dividends:
>Enter the amount or percent, if any, of interest that was earned from private activity bonds subject to AMT.

State ID:

Enter the 2-letter postal abbreviation of the state in which the exempt-interest dividends were earned. Valid territory codes for this field include AS - American Samoa; FM - Federated States of Micronesia; GU - Guam; MH - Marshall Islands; MP - Mariana Islands; PR - Puerto Rico; PW - Palau; VI - U.S. Virgin Islands.

[sscritic]

The instructions I copied were for the 1099-INT, i.e., instructions for the payer, e.g., Vanguard, not instructions for the individual taxpayer. The words Schedule B do not appear in those instructions.

http://www.irs.gov/pub/irs-pdf/i1099int.pdf

I haven't started reading instructions for myself yet; I am still trying to help Vanguard and TT.

[richard]

I'm not sure there's a problem here. If you look at 2011 - 1099 Div, you will see Boxes 1-9; if you look at the 2012 version, there are Boxes 1-12. Box 10 is labeled "Exempt Interest Dividend", Box 11 deals with Private Activity bonds info and Box 12 is the State Code. Heres the TT explanation

Exempt-interest dividends will NOT be listed on Schedule B, but will be included on Form 1040, line 8b as tax-exempt interest.

TT (or at least my copy) lists the fund name on Schedule B

The real problem is when TT carries the information over to the state return. NY includes a line for interest income on state bonds other than NY bonds. For a fund with interest from more than one state TT carries all interest from the fund to the NY return, but it should only carry over the NY portion. The only ways I can find to deal with this are (1) pretend the 1099-DIV is a 1099-INT, as TT lets you break-down the fund by state, (2) pretend there are two 1099s for each fund, one showing NY interest and one with other interest, (3) manually override the amount on the NY return. The first alternative seems the best to me, but I want to make sure I'm not missing something.

With luck TT will fix this shortly, but if not (and for early filers), this thread might be of some use.

[richard]

The instructions I copied were for the 1099-INT, i.e., instructions for the payer, e.g., Vanguard, not instructions for the individual taxpayer. The words Schedule B do not appear in those instructions.

http://www.irs.gov/pub/irs-pdf/i1099int.pdf

I haven't started reading instructions for myself yet; I am still trying to help Vanguard and TT.

Vanguard doesn't seem to need any help in this regard.

I posted a link to the Schedule B instructions above.

[HueyLD]

I will wait until my state's tax forms are available before I spend any more time on this. I am optimistic that it will be all right.

[richard]

I will wait until my state's tax forms are available before I spend any more time on this. I am optimistic that it will be all right.

A wise course. I hope your optimism is justified.

[sscritic]

My approach to taxes is covered here:

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.

and here:

Under penalties of perjury, I declare that I have examined this tax return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete.

Now they may look the same to you, but they are not. One is what I tell the IRS, the other is what I tell my state. I don't swear allegiance to Vanguard, and I don't swear allegiance to TT or any other software company.

My taxes are my taxes.

I have found errors in tax software in the past. Why would you believe your tax software? Do what you know to be true, complete, and correct.

CA has a 50% rule for tax exempt interest from mutual funds; that's 50% of assets, not 50% of income. Vanguard gives me the correct information, but does my tax software know the applicable percentages for every mutual fund? I actually don't care, as I will make sure my return is, to the best of my knowledge and belief, true, correct, and complete.

OK, so I just looked back at the last tax software that I used. It asked my what part of my interest was tax exempt in my state; it made no attempt to calculate it for me. I calculated it myself, so I didn't have to worry if the tax software was doing it correctly. Buy dumber software that won't give you these problems.

[Anon1234]

sscritic: Do you use HR Block software?

[sscritic]

sscritic: Do you use HR Block software?

How did you guess?

Code: Select all

This is for the state where you were a full-year resident in 2010 . Learn more

How much of this interest is exempt from state tax?

Box 8 Interest   Amount Exempt From State Tax
   $xxx          [entry box]   


Cheap software doesn't make the mistake of putting your interest in the wrong place in the wrong amounts; it let's you do that yourself. It is your return after all.

[jebmke]

I will wait until my state's tax forms are available before I spend any more time on this. I am optimistic that it will be all right.

A wise course. I hope your optimism is justified.

Same here. In our TaxAide sites (still in training) we don't even let people touch the 2012 software yet. All their training is in 2011 for now and then we will have an express training on the 2012 system when we think it is stable.

[HueyLD]

I will wait until my state's tax forms are available before I spend any more time on this. I am optimistic that it will be all right.

A wise course. I hope your optimism is justified.

Well, my state's tax program is finally available and TT has it loaded. Unfortunately for tax-exempt dividends, one must create a separate 1099-DIV to report the in-state muni dividends.

Here is what TT says on its help screen:

"Reporting Exempt-Interest Dividends from Multiple States

If you are required to file a state tax return, and you have exempt-interest dividends that come from both your home state and other states, then you may wind up paying higher states taxes if you report all of your exempt-interest dividends as being from More Than One State.

For example, let's say you live in California and received $900 in exempt dividends from California and $100 in exempt dividends from other states. If you simply report $1,000 as exempt dividends from More Than One State, then when you file your California return all $1,000 will be taxed by California.

To avoid having exempt dividends from your home state taxed, you'll need to separate the exempt dividends from your home state and those received from other states. Then report the amounts on two separate 1099-DIV Forms in TurboTax. So in the example above, you would create one 1099-DIV to report $900 of exempt dividends from California. You would then create a second 1099-DIV to report $100 of exempt dividends from More Than One State."

One extra 1099-DIV per brokerage house. No big deal.

[richard]

One extra 1099-DIV per brokerage house. No big deal.

Isn't it one extra 1099-DIV per fund rather than per brokerage house?

In any event, if you do this, you then have two entries for each fund on Part II of Schedule B. I'm concerned this looks odd and could confuse IRS matching programs.

If you pretended the income was reported on a 1099-INT, there is no entry on Schedule B. I don't see any other difference between reporting on a 1099-INT and 1099-DIV. I don't see anything in the rules that requires you to list a payer with zero interest or dividends.

[HueyLD]

In any event, if you do this, you then have two entries for each fund on Part II of Schedule B. I'm concerned this looks odd and could confuse IRS matching programs.

Sorry, I meant one extra entry per applicable fund. Since they are TE dividends, they won't show up on Part II of Sch. B at all. Rather, they will be added by the software with the sum reported on Line 8b of F1040.

I wish TT could have the capacity of a professional software. However, TT is only an inexpensive retail software and we just have to use the work around as available in TT. I've used the workaround (i.e., additional 1099 entries) for more than just TE interest. For example, prepaid accrued interest and amortization of bond premium that are associated with specific bonds. By that, I divide up an interest amount on 1099-INT (or DIV for year 2012) into more than one entries and handle each specific item (home state TE interest, <> home state TE interest, prepaid accrued interest and ABP thereof) accordingly. It could get messy, but that's what I have to do on TT. Back in the days when I had professional software available (for free), I could handle all such entries on one 1099 input screen.

As such, I am not concerned with the IRS matching program because the total of all 1099-INT's and -DIV's will still match and I can easily explain the multiple entries for the same fund.

[richard]

Since they are TE dividends, they won't show up on Part II of Sch. B at all. Rather, they will be added by the software with the sum reported on Line 8b of F1040.

For me, they show up on Schedule B as well as on 1040 line 8b. Is this not happening for you?

As such, I am not concerned with the IRS matching program because the total of all 1099-INT's and -DIV's will still match and I can easily explain the multiple entries for the same fund.

I'd rather things don't get to the point where I have to explain things, even if the explanation is easy.

[sscritic]

My tax exempt dividends show up on Schedule B Part II as zeros. They show up as dollars on line 8b. Your software may not match my software.

[richard]

"Reporting Exempt-Interest Dividends from Multiple States

If you are required to file a state tax return, and you have exempt-interest dividends that come from both your home state and other states, then you may wind up paying higher states taxes if you report all of your exempt-interest dividends as being from More Than One State.

For example, let's say you live in California and received $900 in exempt dividends from California and $100 in exempt dividends from other states. If you simply report $1,000 as exempt dividends from More Than One State, then when you file your California return all $1,000 will be taxed by California.

To avoid having exempt dividends from your home state taxed, you'll need to separate the exempt dividends from your home state and those received from other states. Then report the amounts on two separate 1099-DIV Forms in TurboTax. So in the example above, you would create one 1099-DIV to report $900 of exempt dividends from California. You would then create a second 1099-DIV to report $100 of exempt dividends from More Than One State."

Most states don't tax interest from bonds issued by Puerto Rico or the Virgin Islands. If you're going to use this approach, add PR and VI interest to your home state interest.

It probably doesn't matter if you have no, one or two entries showing zero interest for each tax-exempt fund reported on 1099-DIV, although two entries seems odd and I'm not a fan of odd entries on tax returns.

[HueyLD]

My tax exempt dividends show up on Schedule B Part II as zeros. They show up as dollars on line 8b. Your software may not match my software.

Yes, TT matches your software. What I have done is to label the part with state-exempt int/div clearly as: Vanguard State XX Exempt Div.

[richard]

Yes, TT matches your software. What I have done is to label the part with state-exempt int/div clearly as: Vanguard State XX Exempt Div.

Shouldn't it be: Vanguard XXXX-term tax-exempt, or whatever appears on the 1099-DIV?

[HueyLD]

Yes, TT matches your software. What I have done is to label the part with state-exempt int/div clearly as: Vanguard State XX Exempt Div.

Shouldn't it be: Vanguard XXXX-term tax-exempt, or whatever appears on the 1099-DIV?

Yes, sir. I tried to fit as many characters into the description field as possible. For example, VWIUX NY-exempt Div.

Also, to clarify what I posted earlier. What I meant to say was:

"The T/E amount does not show up on Sch.B even though a line with "VWIUX NY-Exempt Div" is shown on Sch. B with a "zero" amount."

[damjam]

Most states don't tax interest from bonds issued by Puerto Rico or the Virgin Islands. If you're going to use this approach, add PR and VI interest to your home state interest.

Thanks for this tip. I live in NY so this applies to me.

[mickcris]

In any event, if you do this, you then have two entries for each fund on Part II of Schedule B. I'm concerned this looks odd and could confuse IRS matching programs.

Sorry, I meant one extra entry per applicable fund. Since they are TE dividends, they won't show up on Part II of Sch. B at all. Rather, they will be added by the software with the sum reported on Line 8b of F1040.

I wish TT could have the capacity of a professional software. However, TT is only an inexpensive retail software and we just have to use the work around as available in TT. I've used the workaround (i.e., additional 1099 entries) for more than just TE interest. For example, prepaid accrued interest and amortization of bond premium that are associated with specific bonds. By that, I divide up an interest amount on 1099-INT (or DIV for year 2012) into more than one entries and handle each specific item (home state TE interest, <> home state TE interest, prepaid accrued interest and ABP thereof) accordingly. It could get messy, but that's what I have to do on TT. Back in the days when I had professional software available (for free), I could handle all such entries on one 1099 input screen.

As such, I am not concerned with the IRS matching program because the total of all 1099-INT's and -DIV's will still match and I can easily explain the multiple entries for the same fund.

Could you not just make them one 1099 to file your federal taxes? Then go back and separate them into two 1099s before filing state taxes.

[richard]

Could you not just make them one 1099 to file your federal taxes? Then go back and separate them into two 1099s before filing state taxes.

If you're filing electronically and your state requires you to file your federal return with your state return, this wouldn't work.

If you're looking for a mechanical solution, I've yet to see and objection to entering the 1099-DIV as if it were a 1099-INT (assuming all income is federal tax-exempt). TurboTax then lets you split between states (so that it carries over correctly to the state return) and doesn't report multiple zero amount items on Schedule B.

[richard]

I tried to fit as many characters into the description field as possible. For example, VWIUX NY-exempt Div.

I suppose it would be pedantic to point out that the instructions are to "list name of payer." Presumably, the IRS matching program looks to the total amounts rather than names, so it likely doesn't matter.

Also, to clarify what I posted earlier. What I meant to say was:

"The T/E amount does not show up on Sch.B even though a line with "VWIUX NY-Exempt Div" is shown on Sch. B with a "zero" amount."

That's consistent with my experience and it appears with sscritic's experience.

[AQ]

download TT and would start to work on my tax shortly. Noticed the changes from INT to DIV for tax-exempt interests. Wonder if anyone has updats or something to add on this issue.

[sscritic]

download TT and would start to work on my tax shortly. Noticed the changes from INT to DIV for tax-exempt interests. Wonder if anyone has updats or something to add on this issue.

Wait until you start. See if things go in the right place. My bet is they will. Vanguard knows the law, and TT knows the law; they both put tax-exempt interest under DIV.*

* I lie. I don't have TT so I don't know what it does. You will find out shortly.

[greetje]

I had a problem with T Tax.
I had them import my information from Vanguard. I then started to fill out my taxes.
At one point TT asked me for the cost basis and date of purchase and sale for my Vanguard Total International stock fund.
They had the exact number if shares I STILL HAVE in my account at Vanguard. I have not sold any in 2012. In fact, the reason I was perplexed is that I have not sold any fund from Vanguard in 2012. Just have Div and Int which were imported correctly.
I went to the page on TT that says "have you sold any mutua; funds" I say no. But the sale still shows up.
I then went to home page and deleted the International Fund and put it in manually. But no matter what I did. the darn incorrect sale still showed up. After hours with no solution, I deleted the whole return and re entered all the number manually.

On another site, someone said that Vanguard send the imported forms and instead of leaving blank boxes blank they put 0.00 in and TT did not recognize that. If no number in box, leave blank they said.

Another question.
For Total International I have $60.00 foreign tax paid but I only received $9 credit. Why? last year it was $69 and I received a $69 credit.

Another question.
Spouce and I have all our accounts joint, except IRAs. When we get the 1099 DIV and 1099INT some are in my name, some in spouces due to main account holders SS number. Can I just put them all as joint or must I keep them seperated according to the name and SS number on the 1099
We file
maried filing jointly.

[grabiner]

For Total International I have $60.00 foreign tax paid but I only received $9 credit. Why? last year it was $69 and I received a $69 credit.

Look at the individual forms to see where the number comes from. With $60 foreign tax paid, you shouldn't need to file a Form 1116 to claim the credit, so the credit should come directly from the 1099. Check that TurboTax has the correct 1099, and if Form 1116 was filed for some reason, check that the income numbers on it look correct.

[sscritic]

I had a problem with T Tax.
...
I went to the page on TT that says "have you sold any mutua; funds" I say no. But the sale still shows up.
I then went to home page and deleted the International Fund and put it in manually. But no matter what I did. the darn incorrect sale still showed up. After hours with no solution, I deleted the whole return and re entered all the number manually.

As reported elsewhere, I had a problem with H&R Block. I put in a purchase date that made my sale long term, but it kept showing up as short term. I finally got out of the interview and looked at the worksheets. There was a checkbox next to short term that was checked no matter what date I used, but if I unchecked that checkbox, things were fixed. My guess is that you might have a checkbox checked for you by TT that TT won't override based on your interview answers.

[richard]

download TT and would start to work on my tax shortly. Noticed the changes from INT to DIV for tax-exempt interests. Wonder if anyone has updats or something to add on this issue.

TT has not updated their handling of tax-exempt income on 1099-DIV.

TurboTax's recommended approach is to do two entries for the fund from 1099-DIV, one for income from your state and another from income from other states. This will result in two entries on Schedule B with the name of the fund and zero amounts.

Income for Puerto Rico, the Virgin Islands and Guam is usually exempt from state tax, so lump that with income from your state.

You might consider entering the amounts as if they were reported on 1099-INT. This will slightly simplify data entry and eliminate any mention of the fund name on Schedule B. I haven't found any other differences, but be aware this is not an official TT alternative.

[greetje]

For Total International I have $60.00 foreign tax paid but I only received $9 credit. Why? last year it was $69 and I received a $69 credit.

Grabiner wrote
"Look at the individual forms to see where the number comes from. With $60 foreign tax paid, you shouldn't need to file a Form 1116 to claim the credit, so the credit should come directly from the 1099. Check that TurboTax has the correct 1099, and if Form 1116 was filed for some reason, check that the income numbers on it look correct.

No I did not need to fill out the 1116 form. And I did put RIC on the form indicating it is a mutual fund. I also checked the none box saying no other income or taxes from foreign country .
I noticed that on my Fed Tax I owe is $9 and the Foreign tax credit is also $9. so $0 balance due and $0 refund.
Maybe you only get a credit for the amount due in taxes?

[greetje]

I did check on the IRS site on foreign tax credit and it says

"The amount of credit given can not be more than the total tax liability" so that is why I only get a $9 credit instead of $60.
my total tax due is only $9, therefor $9 tax credit.

I was not that concerned about the amount of dollars as much as I was about having an incorrect return and maybe kicking in a audit.

[Kevin M]

Just FYI, I don't believe this is a problem with Vanguard TE funds for CA state filers. CA requires that 50% of assets are invested in CA munis or US tax-exempt obligations, and none of the national TE funds meet this requirement, so I just use XX (multiple states) for national TE funds. The CA TE funds are 100% in CA munis, so I use CA for those funds.

Last year I broke out the national muni funds by state (listed CA and the other entities that are TE in California, and XX for the rest), but it was a waste of time since it didn't affect the end results.

Kevin