Reporting state tax exempt interest from US Agency bonds (eg, FHLB)
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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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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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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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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Matt91 / KristeneS
I just discovered the same issue when trying to file in Massachusetts.
Were you able to file your state tax using different software to adjust the Box 1 interest?
Any other tips and tricks you discovered would also be helpful.
Thank you
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Hello bobjez,
You can report the state non-taxable interest amount from Box 1 of your 1099-INT in your FreeTaxUSA account. To do this, go to State > Income. Under Interest from Massachusetts banks, select the option that applies. If only a portion of the interest income is tax-exempt, select yes and a box will be provided to add the tax-exempt amount.
If you have questions or need additional assistance, please contact Customer Support from your account for help.
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I have the same question for California. My FHLB interest is in Box 1 on the 1099. How do I adjust this for my state return? I'm not seeing a specific question for it in the walkthrough for the state return?
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I don't think this is correct, the interest wasn't earned from a bank, it was earned on an government agency bond (e.g.FHLB) which has interest that is exempt from state tax . The question you reference reads "Enter the total amount of interest you earned from deposit accounts in Massachusetts banks:"
Please confirm that there is not another workaround or software fix coming as I am about to file using another tax program based on the response given by KristineS on 2/2/2025 which is part of this conversation. Thank you.
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KristineS,
Is there any update on the software update to address agency interest? I'd really like to use FreeTaxusa to file again this year instead of switching to a different vendor. I've confirmed the other vendor allows for State tax adjustments. Please provide any available status.
Thank you.
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.0 -
This workaround is not appropriate and will not solve the problem. Agency bonds are not from Massachussetts banks, and even if they were, the deduction of interest from Massachusetts banks has a limited amount allowed for the year. Agency bond interest is state-tax exempt without limitation!.
Also, it does not seem necessary to fix this in any state tax return form, but instead should be information entered in the Federal section. I have used other software programs (e.g., TaxAct, Turbotax, etc.) that asks you in the Federal section if any of the interest entered in Box 1 of Form 1099-INT is from these Agencies and should therefore be state-tax exempt, and it even give examples such as Tennessee Valley Authority, Federal Home Loan Banks, and Federal Farm Credit Banks. This interest is tax-exempt in most if not all states so, in the event of 1-2 states taxing this interest, you could simply put a question in the state section FOR THAT STATE asking if any of the tax in Box 1 of the 1099-INT is from an Agency that is NOT taxed-exempt in that state.
The interest from the Agencies mentioned above has always been state-tax exempt. How is it possible that TaxFreeUSA has never corrected this simple fact. In my case, this would cost me in state taxes an extra $530!! You must find a way to resolve this as this is now sending me back to use my previous provider after having spent all this time entering my information for my tax returns, to find out close to the end of my state tax return that you do not support this simple tax fact!!
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@TaxUserJL
Unfortunately, this is something our software does not support at this time. I do understand the frustration and apologize. I had provided feedback to our product development team to see if this is something we can support in future editions of the software.We are not able to recommend or provide workarounds, but if you do find a way to report it that works in getting it reported on your federal return and subtracted on your state return, you are welcome to do that.
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Thank you KeriC. Looking at other programs, they just added an instruction to the Federal Q&A stating that, any Agency interest from FHLB, FFCB and TVA that is reported in Box 1, should be moved from Box 1 to Box 3 of the 1099-INT, as if it was Treasury interest, since it receives the same state-tax exempt treatment. I also got this recommendation from an expert CPA who mentioned that the IRS does not have a problem with this, since the total Federally taxable interest does not change from what was reported to them in the 1099-INT.
Hopefully your team can add this instruction in future releases as it would not require any programming. Otherwise, I am volunteering here this workaround for others to see.
Thank you.
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