My client sold a US Treasury Bond and got $5,000 of accrued market discount, which is reported on Schedule B. It dawned on me that this may be eligible to be treated as US Government interest, therefore not taxable on the Massachusetts return. Does anyone know if this should be treated as US Government interest?
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This topic was recently discussed in great detail.
Bottom line: The amount that transfers from Sch D (basis adjustment) to Sch B is **NOT** deemed to be federal government interest. State income taxes apply. -
I called the FTB. The representative told me Treasury Accrued Market Discount is not taxable by CA.Comment
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"I called the FTB. The representative told me".
That's next to meaningless, and certainly not something you could rely on if challenged. Did you read the prior discussion that FEDUKE404 alluded to? Should be easily searchable."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
"That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe HowardComment
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Not sure what kind of Treasury bond "discount" wer're talking about here. A regular T-bond or a zero coupon.
A zero is sold at a nominal amount and accrues to become the face amount at maturity but does not pay out interest each year.
Are we saying that the accrued U.S. Govt accrued interest on such a bond is not considered to be excludible from state tax ?Comment
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"Not sure what kind of Treasury bond "discount" wer're talking about here"
We are talking about market discount, which is not at all the same thing as OID. Market discount is not an obligation of any government on government debt, it's the extra amount a previous buyer of the bond had to pay you (in the form of a discount) to get you to buy a bond with an interest rate below the current market rate."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
"That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe HowardComment
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RWG - this is a "market discount" bond sold in the secondary market sometime after issue. You should consult IRC 1276-1278.
Kram (aka Mark) - I tend to think OID is what the FTB assister spoke about. For purposes of the taxpayers gain on the sale, the gain is ordinary to the extent of the $5K MD. It involves a capital gain sale. It is not interest derived from a US obligation.
You might want to take a look at the code of CA regulations. In particular title 18, section 24271(e) which in part contains:
(B) Interest on Government Obligations--Chapter 3. Interest on bonds and other obligations of the United States, the District of Columbia, and territories of the United States is exempt from state taxation under the Constitution and the laws of the United States. Interest upon bonds of this State or its political subdivisions issued after November 4, 1902 is exempt from state taxation under the State Constitution.
Interest received or accrued on warrants, judgments, claims for refund, etc., and similar obligations of California, its subdivisions, or the United States and its territories is not exempt from tax. Interest on all bonds and obligations of other states and foreign countries, including those of the Philippines, the commonwealth of the Philippines or the political subdivisions thereof issued on or after March 24, 1934, is also subject to tax.
Although interest on bonds and obligations of the United States is exempt from taxation, gains and profits from the sale or other disposition of such bonds and obligations are taxable to the same extent as gains and profits from the sale or exchange of other property.
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