Just a note, before I explain the issue. I have done my taxes by hand, reading the IRS booklets my entire life (for many decades now). So I am very familiar with the actual IRS and California state rules, regarding certain things. This year is the first time I'm using TurboTax, in order to help my mother do her taxes (her accountant retired). I thought it might make things easier for various reason.
My mother has a small amount of income from U.S. Treasuries. On the California schedule 540-CA, for making adjustments for differences between taxable income for federal purposes and for state purposes, one enters the amount earned on U.S. Treasuries and other Federal debt obligations in column B (subtractions) in order to reduce one's state taxable income, by the appropriate amount.
The California instructions clearly state that this amount is treated as tax exempt interest and should be entered on line 2, column B, of schedule 540-CA.
Page 58 of the California 540 Forms & Instructions booklet (2023):
"Line 2 – Taxable Interest
If you did not receive any of the kinds of income listed (within this line
instructions), make no entry on this line in either column B or column C.
Enter in column B the interest you received from:
• U.S. savings bonds (except for interest from series EE U.S. savings
bonds issued after 1989 that qualified for the Education Savings Bond
Program exclusion).
• U.S. Treasury bills, notes, and bonds.
• Any other bonds or obligations of the United States and its territories."
However, TurboTax enters the amount of taxable interest on line 3, column B instead. This is an understandable mistake, because line 3 is for dividends (as opposed to interest) and the 1099-DIV one normally receives reporting earnings on Treasuries reports those earnings as dividends. But the California booklet clearly states the only place to enter earnings from U.S. Treasuries is on line 2, regarding interest.
Confusingly, if you look at the interest and dividend adjustment worksheet, which TurboTax produces for working these things out, before entering them on the actual California tax forms, TurboTax has two separate places that address interest/dividends on Treasuries. Line 1 in the section Interest Income Adjustments, labeled: "Bonds or obligations of the United States or any of its territories." And then in the Dividend Income Adjustments section a mini worksheet for "U.S. obligations exempt-interest dividends." Turbotax ignores the first section regarding U.S. obligations and uses the second one, which ends up entering the adjustment on the wrong line of the California form, as I explain above. (Also the phrase "exempt-interest dividends" doesn't really make sense, since interest and dividends are two separate things for the purpose of the form in question.)
In the end, this mistake doesn't really make a difference in the adjustment that needs to be made to one's income and the tax consequences. But it is wrong. And the California instruction booklet is so plain and clear on this matter, it's not confidence inspiring to see TurboTax make this mistake.
If I'm missing something, I'd be happy to be corrected. But I've dealt with this for so many decades and puzzled over why California treats earnings on Treasuries as interest, rather than dividends. And the California booklet is quite plain in its directions. So what's worrying me is that it seems like the people who designed TurboTax did not read the California booklet correctly. In which case, what else have they missed?
posted
March 19, 20246:36 PM
last updatedMarch 19, 20246:45 PM
