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

Comments

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 232

    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.

  • 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?

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 232

    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.

  • bobjez
    bobjez Member Posts: 2 Newcomer

    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

  • TriciaD
    TriciaD FreeTaxUSA Agent Posts: 25

    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. 

  • taxmom
    taxmom Member Posts: 1 Newcomer

    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?

  • bobjez
    bobjez Member Posts: 2 Newcomer
    https://community.freetaxusa.com/discussion/comment/4416#Comment_4416
    https://community.freetaxusa.com/discussion/comment/4775#Comment_4775

    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.

Categories