Treatment of federal accrued market discount on state tax return

[FEDUKE404]

Client sold some Treasury bonds where accrued market discount was an issue.

The brokerage firm (kudos to Charles Schwab) reported all of the relevant information on their Forms 1099 tax documents. The amount for each of the five sales now appears as a negative number in column g of Form 8879, with code D shown in column f of Form 8879. When all the dust has settled, there is NO net gain / loss reported in column h of Form 8879. The total of the accrued market discounts automatically appears as a single line entry ("Accrued Market Discount") in Part I of Schedule B. It's wonderful when everything works as it should!

But here is my question: Since the amount shown on Schedule B is related to US Treasury income, can that amount ON THE STATE TAX RETURN be shown as a subtraction adjustment from federal AGI in a manner similar to how interest on US savings bonds is handled? Logical thinking might reason the action is allowable, but I have been unable to find anything to support / dismiss that conclusion. At this stage there is also nothing I can locate in my tax software that addresses this specific issue.

What can, or should, I do on the state return? We are talking of ~$1k of "federal" income that would (perhaps) be nice to remove from the state tax return.

All input is appreciated.

FE

[FEDUKE404]

I was hoping someone on this TTB board could come up with an answer re any state taxation / exemption aspects of the Schedule B interest income.

FWIW: It appears the accrued market discount amount can only be used for a Schedule D taxable gain, namely a basis adjustment for Schedule D and then that amount goes to Schedule B as ordinary (but is it US Treasury?) income. Anything that would reduce the net adjusted Schedule D gain below zero apparently just goes away without further tax consequence.

( Absent any definitive answers, I guess my only recourse is to leave the Schedule B interest amount INCLUDED in the state adjusted gross income. )

The investment person won't give any "tax advice" (and likely would not understand the question), and my tax software people just send me "how to" links that are broad in nature and essentially useless for answering this question.

FE

[terryats]

It is my understanding that government bonds sold are capital assets, and the discount/premium only effects basis. Any interest is a subtraction for state.

[FEDUKE404]

It is my understanding that government bonds sold are capital assets, and the discount/premium only effects basis. Any interest is a subtraction for state.

That's where my "logic" is trying to take me, which would first require the interest shown on Schedule B to be "federal income only."
Once you cross that bridge, I cannot find any suitable line on North Carolina D-400 Schedule S, other than perhaps line 18 ("Interest income from obligations of the United States or US possessions").

Since the calculated Schedule B income is close to $1k, I'm going to keep looking around.

Thank you for taking the time to respond!

[JoeyVegas]

I looked into it somewhat and it appears the accrued market discount on Treasuries is NOT excludable at the state level. After-market discounts are not treated as interest on state returns as far as I can tell.

[FEDUKE404]

I looked into it somewhat and it appears the accrued market discount on Treasuries is NOT excludable at the state level. After-market discounts are not treated as interest on state returns as far as I can tell.

Thank you for the extra effort!
That is the same conclusion I eventually reached re state taxation of the amount that is transferred to Schedule B from Schedule D.