Reporting state tax exempt interest from US Agency bonds (eg, FHLB)

Matt91
Matt91 Member Posts: 2 Newcomer
in State Filing

Interest from (some) US Agency Bonds are exempt from state taxation. An example is Federal Home Loan Banks, FHLB, which is exempt from all state income taxes. However, interest from these bonds is reported on 1099-INT in Box 1, rather than Box 3. Therefore, this interest is treated as taxable in the state module by default.

I believe I should be able to override or edit something in the state module to reflect that this Box 1 interest is, in fact, exempt from state income taxes.

How can i figure out where I can do this?

thanks

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  • KristineS
    KristineS FreeTaxUSA Agent Posts: 220

    Hi Matt91,

    You're correct that FHLB interest is exempt from state tax.

    In most instances, though not all, FreeTaxUSA state sections include the most commonly listed 'subtractions from income' types, where this income information is entered and subtracted out on the state return.

    Our software is cloud based and doesn't allow an override function.

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  • Matt91
    Matt91 Member Posts: 2 Newcomer

    Thanks @KristineS

    My state (Maine) doesn't seem to have this as an option. I've read that some people manually "correct" the 1099 info they enter, and move the amount from Box 1 to Box 3.

    I suppose that's the only method to use, other than filing my state return via another mechanism?

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  • KristineS
    KristineS FreeTaxUSA Agent Posts: 220

    Hi again Matt91,

    Yes, our software does not have this provision for Maine. I can make a request to our development team to include this. I don't know how long this takes, but my guess is later this year and/or perhaps ready for the 2025 filing season.

    In the meanwhile, I don't recommend 'correcting' Form 1099. All income is first reported to the IRS first on the federal return, and then ported to the state as appropriate. You'll want your return to match at the IRS for what was reported for interest.

    To claim this state exemption which you are eligible for on your 2024 state income tax return, you may need to use a different tax retail software provider.

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