Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

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LonScott
Posts: 36
Joined: Wed May 13, 2015 12:21 pm

Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

Post by LonScott » Thu Jun 14, 2018 8:24 am

Certain US Agency Bond interest is exempt from State Income Tax: “Interest income from some agency bonds, such as those issued by Federal Farm Credit Banks Funding Corporation, Federal Home Loan Banks, and Tennessee Valley Authority (TVA), is exempt from state and local tax. The interest income from bonds backed by Fannie Mae and Freddie Mac, however, is not exempt from state and local tax.” Fidelity

However IRS Instructions for 1099-INT Line three only include: “Box 3. Interest on U.S. Savings Bonds and Treas. Obligations Enter interest on U.S. Savings Bonds, Treasury bills, Treasury notes, and Treasury bonds. Do not include in box 1.”

So where do brokerage 1099-INTs put the above state tax exempt interest Agency Bond interest? It looks like taxpayers/preparers have to make a manual adjustment, which is always risky. I want to avoid the state equivalent of a CP2000.

1099 instructions from Vanguard, Fidelity, TD, Pershing, NFS do not address this issue, though Pershing does state: Separate subtotals are reported in three categories for interest earned (if applicable): U.S. corporations, foreign corporations, U.S. government agencies and tax-exempt interest from tax-exempt bonds, mutual funds, UITs, WHFITs and WHMTs

Well Fargo Advisor 1099 instructions state: :Box 3 (Interest on U.S. Treasury Obligations): The amount
of interest income (including accrued interest) you received
from U.S. Savings Bonds, Treasury Bills, Treasury Notes and
Treasury Bonds. While taxable by the Federal government,
interest reflected in Box 3 is exempt from any state or local tax.
Payments made by various agencies “backed” by the U.S.
Government (such as the Tennessee Valley Authority [TVA],
FHA, FNMA, GNMA) are not direct obligations of the U.S.
Treasury and may be subject to state taxes. Therefore,
payments by those agencies are included in Box 1.

LonScott
Posts: 36
Joined: Wed May 13, 2015 12:21 pm

Re: Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

Post by LonScott » Thu Jun 14, 2018 10:47 am

I am pretty one has to make a manual adjustment and hope the State understands. Still, I am wondering if anyone has any experience with state taxation.

Here are the instruction for VA: Form 760-ADJ Line 4: Subtractions from Federal Adjusted Gross Income Income (interest, dividends or gains) from obligations or securities of the U.S. exempt from state income tax, but not from federal tax.

Website: Obligations of the U.S.
Virginia law allows a subtraction for income (interest) derived from obligations or income (dividends and gains) derived from the sale or exchange of obligations of the United States, and on obligations or securities of any authority, commission or instrumentality of the United States to the extent the income is included in federal adjusted gross income. The amount to be subtracted is the income less any related expenses already deducted on the federal return. The subtraction applies only to income from direct obligations. For information on obligations that qualify for the subtraction, see PD 94-281 (that is 1994!) which has this list below:

Issuing Organization Virginia Tax Status of Bond Issues

Armed Services Mortgage Insurance
(12 U.S.C.A. 1748b[f]) Exempt
Asian Development Bank Taxable
Banks for Cooperatives (12 U.S.C.A. 2134) Exempt
Commodity Credit Corporation (15 U.S.C.A. 713a-5) Exempt
Export-Import Bank of the United States
(12 U.S.C.A. 635d) Exempt
Farm Credit Banks (12 U.S.C.A. 2023) Exempt (2)
Federal Deposit Insurance Corporation (FDIC)
(12 U.S.C.A. 1825) Exempt
Farmers Home Administration Taxable (3)
Federal Financing Bank (12 U.S.C.A. 2288) Exempt
Federal Home Loan Bank (12 U.S.C.A. 1433) Exempt
Federal Home Loan Mortgage Corporation
(Freddie Mac) Taxable
Federal Housing Administration Exempt (3)
Federal Intermediate Credit Bank (12 U.S.C.A. 2023) Exempt
Federal Land Bank (12 U.S.C.A. 2098) Exempt
Federal Land Bank Associations (12 U.S.C.A. 2055) Exempt
Federal National Mortgage Association
(Fannie Mae) Taxable
Federal Savings and Loan Insurance Corporation
(FSLIC) (12 U.S.C.A. 1725[e]) Exempt
Financial Assistance Corporation (12 U.S.C.A. 2278b-10) Exempt
Financing Corporation (FICO) (12 U.S.C.A. 1441[e][8]) Exempt
General Services Administration Taxable (3)
Government National Mortgage Association
(Ginnie Mae) Taxable
Guam, Government of Exempt (4)
Inter-American Development Bank Taxable
International Bank for Reconstruction & Development Taxable
Maritime Administration Taxable (3)
Mutual Mortgage Insurance Fund Exempt (1)
National Defense Housing Insurance (12 U.S.C.A. 1750c[d]) Exempt (1)
Production Credit Association (12 U.S.C.A 2077) Exempt
Puerto Rico, Government of Exempt (5)
Rental Housing Insurance (12 U.S.C.A. 1747[g]) Exempt (1)
Small Business Administration Taxable (3)
Samoa, American Exempt (6)
Student Loan Marketing Association (Sallie Mae)
(20 U.S.C.A. 1087-2(b)(2)) Exempt
Tennessee Valley Authority (16 U.S.C.A. 831n-4[d]) Exempt
United States Treasury Bills, Notes and Bonds
(31 U.S.C.A. 3124[a]) Exempt
United States Savings Bonds (Series E, EE, H, HH, etc.)
(31 U.S.C.A. 3124[a]) Exempt
United States Postal Service (39 U.S.C.A. 2005[d][4]) Exempt
Virgin Islands, Government of Exempt (7)
War Housing Insurance (12 U.S.C.A. 1739[d]) Exempt (1)

Katietsu
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Joined: Sun Sep 22, 2013 1:48 am

Re: Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

Post by Katietsu » Thu Jun 14, 2018 11:04 am

The general answer to your question is that the 1099-INT and 1099-DIV do not address state tax treatment. Sometimes they provide enough information directly to determine appropriate state tax treatment, ie US Savings Bond interest. Sometimes it can take a lot of research to obtain the information needed for calculating state taxable income, ie some municipal bond funds.

I am not sure exactly what type of income you are struggling with. I think you are approaching it correctly. However, it might be helpful if you post your specific situation instead of a lot of general information.

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neurosphere
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Re: Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

Post by neurosphere » Thu Jun 14, 2018 11:15 am

You can look up the info you are looking for here: https://personal.vanguard.com/us/insigh ... guardfunds

You can find a list of the percentage of government obligations for each fund. I'll bet that Vanguard's definition of "government obligations" matches the list of bonds which VA does not tax:
**Investments in U.S. government obligations may include the following: Banks for Cooperatives, the Commodity Credit
Corporation, the Federal Deposit Insurance Corporation, Federal Farm Credit Banks, the Federal Financing Bank, Federal Home
Loan Banks, Federal Intermediate Credit Banks, Federal Land Banks and the Federal Land Bank Association, the Federal Savings
and Loan Insurance Corporation, the General Insurance Fund, the Government Services Administration (GSA Public Building Trust
Participation Certificates), the Production Credit Association, the Student Loan Marketing Association, the Tennessee Valley
Authority, the U.S. Postal Service, and the U.S. Treasury Department (bonds, notes, bills, certificates, and savings bonds). GNMA
securities aren’t U.S. government obligations.
Just look up the fund you own, the amount of dividends received, multiply that by the percentage of government obligations, and use that number as the subtraction/offset/adjustment on your VA tax form, i.e. dump that number on line 4. :D
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

FactualFran
Posts: 693
Joined: Sat Feb 21, 2015 2:29 pm

Re: Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

Post by FactualFran » Thu Jun 14, 2018 2:04 pm

LonScott wrote:
Thu Jun 14, 2018 8:24 am
So where do brokerage 1099-INTs put the above state tax exempt interest Agency Bond interest? It looks like taxpayers/preparers have to make a manual adjustment, which is always risky. I want to avoid the state equivalent of a CP2000.
In the annual tax reporting statements that I have received from Fidelity, the Agency Bond interest is "1. Interest Income". With the income tax return for state where live, values from lines of the federal returns are entered first. Later lines of the state return have additions and subtractions to the federal Adjusted Gross Income. The subtraction for interest from federal government obligations is the sum of "3. Interest on U.S. Savings Bonds and Treas. Obligations" on Form 1099-INT plus the amount of federal agency interest in "1. Interest Income" on Form 1099-INT.

LonScott
Posts: 36
Joined: Wed May 13, 2015 12:21 pm

Re: Experiences with 1099 INT reporting and/or manually adjusting state tax exempt US Agency bond interest?

Post by LonScott » Thu Jun 14, 2018 3:27 pm

@ FactualFran Thank you, that seems to be the way to do it.
Katietsu wrote:
Thu Jun 14, 2018 11:04 am
The general answer to your question is that the 1099-INT and 1099-DIV do not address state tax treatment. Sometimes they provide enough information directly to determine appropriate state tax treatment, ie US Savings Bond interest. Sometimes it can take a lot of research to obtain the information needed for calculating state taxable income, ie some municipal bond funds.

I am not sure exactly what type of income you are struggling with. I think you are approaching it correctly. However, it might be helpful if you post your specific situation instead of a lot of general information.
I am looking at buying Agencies that are exempt from state income tax instead of US Treasuries but am concerned Frickin Total Boneheads that run my state income tax will question it. US Treasury interest goes to Box three so they see that. As FactualFran mentions, it seems exempt US Agency interest in Box 1 has to be manually adjusted out. While this probably on the details of the 1099, FTB does not see that detail in a computer matching program - which is how the IRS finds mismatching and sends out CP2000s.

As you state this a state issue, not a 1099INT issue, so it has to be done as an adjustment. The easy solution is to just invest in Treasuries.

This may not be a problem for many states but mine is not user friendly, and it is not VA. VA just has the most information I was able to find.

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