Most of the interest income you earn is taxable by both the federal and state governments. However, some types of interest may be exempt from federal and/or state income tax. We use the State Interest Worksheet to reclassify your interest income so that it will receive the proper treatment under the state's income tax rules. If you were a nonresident or part-year resident, we also use the worksheet to allocate your interest income according to state tax rules for your resident status. We then carry the amounts from the worksheet to your state tax forms.
When you prepared your federal return, you entered information relating to your interest items on Form 1099-INT/OID, on Schedule K-1 (Partnership/S Corporation), or on Schedule K-1 (Estate/Trust). Based on the entries you made, we've completed Part I of the State Interest Worksheet.
You should review the information entered on Part I of the State Interest Worksheet. You'll notice each interest item contains at least two lines. The first line contains the name of the payer and the gross amount of interest income reported for federal purposes, less any federal adjustments. The following lines contain the state classifications for each item, as well as the gross amount of the income and the amount taxable in your state. You should carefully review the classification of your interest and make sure it's consistent with the state types described.
If you were a nonresident or part-year resident, you should complete Part I as if you were a full-year resident, then proceed to Part II to allocate your interest income between your residency and nonresidency periods.
Note: If you invested in mutual funds, you should have reported any income earned by the funds, including any exempt interest dividends, on Form 1099-DIV in our federal program. We'll automatically carry this information to the State Dividend Worksheet.
To assure that each interest item receives the proper tax treatment on your state return, you should check that the state type assigned to each item is consistent with the descriptions below.
Regular interest is fully taxable for state income tax purposes and is generally reported in box 1 of Form 1099-INT/OID, line 5 of your Partnership Schedule K-1 , line 4 of your S Corporation Schedule K-1, and line 1 of Schedule K-1 (Estate/Trust). Type 1 interest includes interest from a savings or checking account as well as interest from a seller financed mortgage.
Interest from U.S. Treasury obligations is taxable for federal income tax purposes but is exempt from state income tax. This interest is reported in box 3 of Form 1099-INT, line a of the Mini-Worksheet for Form 1099-OID, or in box 2 or box 6 of that form. In addition, interest from U.S. Treasury obligations is reported on the second box on Line 5 of the your Partnership Schedule K-1, the second box on Line 4 of your S Corporation Schedule K-1, or the second box on Line 1 of Schedule K-1 (Estate/Trust). Type 2 interest includes interest from U.S. Treasury bills and notes, and U.S. Savings Bonds.
Interest from municipal bonds issued by a state or local government agency is exempt from federal income tax. The interest is reported on line 8 Form 1099-INT/OID . It is also reported on Line 18 of your Partnership Schedule K-1, Line 16 of your S Corporation Schedule K-1, or on line 14 of Schedule K-1 (Estate/Trust).
Generally, these bonds are exempt from state income tax only in the state that issued the bonds. If you had any federally exempt interest, you were asked to enter the amount of the interest that's exempt from state tax in the state in which you were a resident for the entire tax year.
Interest from municipal bonds issued by your state of residence is exempt from state income tax in that state. We carry the amount of this interest from line a of the Mini-Worksheet for Line 8 of Form 1099-INT/OID, the line 18 on your Schedule K-1 for Partnerships and line 16 on your Schedule K-1 for S Corporations, and line a of the Mini-Worksheet below Line 14 of Schedule K-1 (Estate/Trust).
If you were a part-year resident or nonresident, you should enter the amount of interest earned from municipal bonds issued by the state for which you are filing this return directly in the corresponding space in Part I of the State Interest Worksheet. You can generally find this information on the Form 1099-INT or Form 1099-OID, or on the substitute Form 1099-INT or Form 1099-OID, that you received from the payer of the interest or the broker holding the obligations on your behalf.
Interest from municipal bonds issued by any state other than your state of residence is generally subject to income tax by that state. We automatically calculate the amount of the interest as the difference between the amount of federally exempt interest from this source and the amount of Type 3 interest from the same source.
Note: If you were a part-year resident or nonresident, we calculate this amount for you as if you were a full-year resident, and you must complete Part II of the State Interest Worksheet to determine the actual interest taxable in the state for which you are filing this return.
We total the amount of each state type on the State Interest Worksheet and carry these totals to Part II, the Interest Income Summary "Full-Year Resident" column, on page 2. Be sure to review this summary as we'll carry your interest income from there to your state return.
If you're filing this state return as a nonresident or part-year resident, the amount in the "Resident Period" column should include all interest income earned while you were a resident. The amount in the "Nonresident Period" column should only include interest income you earned in connection with a business, trade, profession, or occupation that you carried on in the state while you were a nonresident.
If any of the amounts on your State Interest Worksheet are incorrect, do not fix these amounts by overriding the amounts we calculate for you. Because all of the information necessary to complete Part I of the State Interest Worksheet (other than the amount of Type 3 interest for part-year residents and nonresidents) is carried from your federal return, you should make any changes to this information directly on Form 1099-INT/OID, Schedule K-1 (Partnership/S Corporation), or Schedule K-1 (Estate/Trust) in the federal program.
Similarly, if you change any of the interest items in your federal return after you've completed the State Interest Worksheet, you should re-check the state worksheet to assure that the changes are properly reflected on the State Interest Worksheet.