Taxes on US bond EFTs?

Yes, U.S. Treasury and some agency (e.g. FICO) bond interest is not state taxable.

Yes, for example in California there is a line for such interest amounts on the "California Adjustments" part of form 540.

I do not know whether all tax software does not care of this, I would hope some tax software would at least prompt you for this. It should be in box 3 and not box 1 of the 1099-INT so I think it should be automatic in theory. You were not out in the weeds for thinking it should be automatic.

Steve

NY returns the govt bond interest must be entered on the subtractions section of the NY 201 return.

bw

I had a similar issue in the sense that I had assumed that I was invested in funds that weren't subject to state income tax. However, if that is the case, then I think it would be reflected on the 1099INT in the same way as, e.g., interest from individual treasuries, but it is not. When I called the fund company, they said the fund is not exempt from state taxes even though it invests in treasuries. I have no idea why, but I guess I just have to follow what the paperwork says.

This may depend on the state you live in. While I believe all states will not tax interest from federal bonds or notes that you own directly, it can be different when it comes to income that you get from mutual funds, ETFs and other "Regulated Investment Companies".

For example, in California, there is a minimum threshold on the fraction of dividends that derive from interest from a mutual fund in order for any of those dividends to be tax-free. So for a general purpose bond fund, the part of the dividends due to Treasuries may be too small for the dividends to qualify for tax-free treatment.

But I would not expect that to be an issue for funds that are primarily and nearly fully invested in US Treasury securities.

This is where having individual bonds differs from bond mutual funds and ETFs. Individual bonds will be reported on 1099INT, which has a line for income derived from federal government obligations. So that should be handled automatically by your tax software for federal taxes. For state taxes, there is generally a question about the amount of municipal bond interest not taxed by your state. [This is because states often exempt their own municipal bond interest but not that from other states. And that information isn't present on the 1099INT form. It's also why there are a number of single-state muni bond mutual funds.]

Mutual fund income comes in the form of dividends and is reported on 1099DIV. That happens to have a line item for dividends derived from municipal bonds, but does *not* have any corresponding line for for federal bond-derived dividends. So this would not be automatic.

Correct.

I think that the software interview should ask if you need to make adjustments to the dividends, but this may not be immediately obvious that you need to do something at that part of the software. And it depends on the particular rules for your state.

Typically this would be on some state form for adjustments to income.

In California this should be line 2 of Form CA(540). The instructions that come with the form are not the most clear about this. [Could that be deliberate?] IIRC those exempt interest dividends are reported for federal tax purposes as dividends rather than interest, but it seems California treats them as interest on CA(540).

In any case, you will need to make an adjustment on the appropriate state form. You may want to look for the state adjustments section of your tax software to have it generate the form properly.

I would expect that you could amend the state without the federal. Nothing on the federal return should be affected, so there wouldn't even be anything to report on the 1040X.