deducting government obligation income from NYS income tax

[bb]

I hold vanguard intermediate term bond index in a taxable account.
Fund holds >50% assets with US government obligations. The income
is reported as ordinary dividends (1099-DIV). According to NYS income from
US government bonds can be deducted but only if it is reported
as interest income - not dividend income. According to the 1040
instructions income from 1099-DIV is reported as dividends.

Anyone know how you would actually go about deducting income from
US government obligations for income tax purposes for NYS?

[FactualFran]

Include the portion of the income dividends from mutual funds due to US government obligations in the "Interest income on U.S. government bonds" line of the income tax form. The instructions for that line includes

Dividends you received from a regulated investment company (mutual fund) that invests in obligations of the U.S. government and meet the 50% asset requirement each quarter qualify for this subtraction. The portion of such dividends that may be subtracted is based upon the portion of taxable income received by the mutual fund that is derived from federal obligations.

[bb]

So would you have to also move that income on the federal 1040 from from dividends to
income? Obviously that would not be a favorable thing to do as you would pay federal
income tax rates on that money vs capital gains and dividends rate?

Issue is NYS says only include income from line 2 - interest income - not line 3 - dividend income.

[FactualFran]

So would you have to also move that income on the federal 1040 from from dividends to
income? Obviously that would not be a favorable thing to do as you would pay federal
income tax rates on that money vs capital gains and dividends rate?

Issue is NYS says only include income from line 2 - interest income - not line 3 - dividend income.

There is no moving of values from an interest line on a tax form to a dividend line. Interest on US Government obligations are taxed as ordinary income by the Federal government. That is the case whether one owns a) US Government obligations and receives interest payments from it or b) shares of a mutual fund that owns the US Government obligations with the mutual fund including in the dividends paid by the mutual fund the interest payments that the mutual fund received from the obligations.

The quote I included from the instructions for the New York income tax form seems clear about being able to include in the subtraction of US Government interest the portion of dividends from mutual funds that are from due to US Government obligations (subject to the mutual fund meeting the 50% of assets requirement each quarter).

[bb]

(Certainly not trying to argue - still a question)

Line 28 of IT-201 is Interest Income on US government bonds

If you go under the instructions for Line 28 it says:

Did you include interest income from U.S. government bonds or
other U.S. government obligations on lines 2, 6, or 11? If No, go
to line 29.

But Line 2 is taxable interest income - not ordinary dividends.
Are you saying it is legit to include US government bonds or
other US government obligations from lines 2 and 3?

[Hodor]

Bond interest payments are not qualified dividends and are taxed at your ordinary interest rate. Only qualified dividends from US and some foreign stocks are taxed at the capital gains rate.

[HueyLD]

S-121
Certain investment income from U.S. government agencies

Enter any interest or dividend income on bonds or securities of
any U.S. authority, commission, or instrumentality that is exempt
from state income taxes under federal laws (but included in
federal income).

https://www.tax.ny.gov/pdf/current_forms/it/it225i.pdf

[bb]

S-121
Certain investment income from U.S. government agencies

Enter any interest or dividend income on bonds or securities of
any U.S. authority, commission, or instrumentality that is exempt
from state income taxes under federal laws (but included in
federal income).

https://www.tax.ny.gov/pdf/current_forms/it/it225i.pdf

Seems reasonable - I did contact NYS and got transferred to someone specifically for it225
and he seemed to be indicating it225 shouldn't be necessary but his rationale was perhaps some
of the ordinary dividend income attributable to US government obligations should be considered
interest payments on 1040 but I didn't find anything to indicate that.

[bb]

Bond interest payments are not qualified dividends and are taxed at your ordinary interest rate. Only qualified dividends from US and some foreign stocks are taxed at the capital gains rate.

I didn't say they were qualified dividends but they do appear on the 1099-DIV as dividends.

[livesoft]

https://advisors.vanguard.com/iwe/pdf/F ... 012016.pdf
shows that of the dividends paid in 2015, only 39.72% are from US Government obligations. Yes, the percentage of assets at year-end is 52.66% government obligations. And the footnote:

This fund meets the threshold requirements for California, Connecticut, and New York, which require that 50% of the fund’s assets at each quarter-end within the tax year consist of U.S. government obligations.

So, if you use tax software, it will take care of this for you.

Or just put in on Line 28 as per the instructions. That's where tax software will put it. Do NOT get hung up on the wording of "dividends" and "interest".

[cherijoh]

I hold vanguard intermediate term bond index in a taxable account.
Fund holds >50% assets with US government obligations. The income
is reported as ordinary dividends (1099-DIV). According to NYS income from
US government bonds can be deducted but only if it is reported
as interest income - not dividend income. According to the 1040
instructions income from 1099-DIV is reported as dividends.

Anyone know how you would actually go about deducting income from
US government obligations for income tax purposes for NYS?

IMO, you are splitting hairs. The fact that it is reported as dividends on the 1099-DIV and the NY state instructions say "interest on Government Bonds" should not prevent you from taking this deduction. If you own the government obligations directly it is reported as "interest", if you own it through a MM or bond funds, it is reported as "dividends".

NC has similar language (i.e., mentioning interest) and I always compute the portion of income from US government obligations and deduct it on my NC taxes. It has never been questioned.

FYI - You DO need to report it as dividends on your Federal 1040. Otherwise you will receive a notice from the IRS.

[Toons]

I hold vanguard intermediate term bond index in a taxable account.
Fund holds >50% assets with US government obligations. The income
is reported as ordinary dividends (1099-DIV). According to NYS income from
US government bonds can be deducted but only if it is reported
as interest income - not dividend income. According to the 1040
instructions income from 1099-DIV is reported as dividends.

Anyone know how you would actually go about deducting income from
US government obligations for income tax purposes for NYS?

IMO, you are splitting hairs. The fact that it is reported as dividends on the 1099-DIV and the NY state instructions say "interest on Government Bonds" should not prevent you from taking this deduction. If you own the government obligations directly it is reported as "interest", if you own it through a MM or bond funds, it is reported as "dividends".




NC has similar language (i.e., mentioning interest) and I always compute the portion of income from US government obligations and deduct it on my NC taxes. It has never been questioned.

FYI - You DO need to report it as dividends on your Federal 1040. Otherwise you will receive a notice from the IRS.

+1

[FactualFran]

Line 28 of IT-201 is Interest Income on US government bonds

If you go under the instructions for Line 28 it says:

Did you include interest income from U.S. government bonds or
other U.S. government obligations on lines 2, 6, or 11? If No, go
to line 29.

But Line 2 is taxable interest income - not ordinary dividends.
Are you saying it is legit to include US government bonds or
other US government obligations from lines 2 and 3?

That quote is only the first paragraph of the instructions for line 28. In a previous post I quoted a later paragraph of the instructions for the same line that was specific to mutual fund distributions. Here are all the paragraphs of the instructions for the line.

Line 28 – Interest income on U.S. government bonds
Did you include interest income from U.S. government bonds or other U.S. government obligations on lines 2, 6, or 11? If No, go to line 29.

If Yes, enter the amount of interest income earned from bonds or other obligations of the U.S. government.

Dividends you received from a regulated investment company (mutual fund) that invests in obligations of the U.S. government and meet the 50% asset requirement each quarter qualify for this subtraction. The portion of such dividends that may be subtracted is based upon the portion of taxable income received by the
mutual fund that is derived from federal obligations.

Contact the mutual fund for further information on meeting the 50% asset requirement and computing your allowable subtraction (if any).

If you include an amount on line 28 from more than one line on Form IT-201, submit a schedule showing the breakdown from each line.

Do not list the same interest more than once on lines 28 and 31; see the instructions for Form IT-225, subtraction modification numbers S-121 and S-123.

To me, the instructions taken as a whole indicate that mutual fund distributions included in line 3 that are from U.S. government obligations, and meet the 50% asset requirement each quarter, qualify to be included in line 28.

[bb]

Thanks for help. Would be nice if when you called the tax department ....