slovo wrote:
- quote -

How annoying. I presume you can override it, but of course
in order to do that, you have to be aware of the issue.

Just as an aside, TurboTax (not the web version) has never,
AFAIK, been set up to allow a credit for taxes paid to
another state by a part-year resident, at least not on a
California part-year resident return (which is the same form
as the nonresident return). The system will tell you that
you are not eligible for the credit because you are a
nonresident of California, even though you WERE a CA
resident for the part of the year for which you are claiming
the credit. You can override, of course.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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O.K. It turns out that Intuit buried an entry for dividends
derived from a US Gov securities from a mutual fund that
invests > 50% of assets in such securities DEEP in the
interview for the California state tax return.

When turbotax for the web asks:
-------------
Any Adjustments to Federal Income? You didn't have any
California adjustments to federal wages, interest and
dividends, or other miscellaneous income on your 2003
return. If you don't have any of these adjustments to report
on your 2004 return, you can skip the topics.

Do you have any California adjustments to federal wages,
interest and dividends, or other miscellaneous income to
report in 2004? If you're not sure, select "Yes" and we will
take you through these topics one at a time.
-----------------
YOU NEED TO CLICK YES !!!!!!!!!!

Then at a subsequent step in the interview you will be
asked:
-------------------------
Enter Municipal Dividends Subtraction Dividend entries on
your federal return show interest income from U.S.
obligations of $X,XXX that was taxable on your federal
return. A subtraction from California income is allowed for
any part of that income that is exempt dividends from a
mutual fund if at least 50% of the fund's assets are
invested in U.S. or California municipal obligations.

Enter the portion, if any, that qualifies for this
subtraction.
Exempt Dividend Subtraction
----------------------
At this point you need to manually compute the sum of:

For each mutual fund that meets the 50% rule mentioned
above:

The amount of dividends from this fund that is derived from
US treasury securities.

If you do this the proper calculations will be made. Thanks
to Intuit for not getting back to me on this NOT. Thanks for
making this so hokey too.

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slovo wrote:

- quote -

I have attempted to report this bug to Intuit but their
mentality seems to be if there is a problem it must be on
the customer side. I even went to the trouble of preparing a
test case for them on Turbotax for the Web site but have not
gotten any response from them. Believe it or not when I
spoke with their tech support people by phone they could not
create a test case themselves because Turbotax for the web
would not let them look at the generated tax forms without
them paying for it :~> They also are unable to examine your
personal return for privacy reasons. One kind of wonders how
their tech support people plan to actually support Turbotax
for the Web.

I wonder how many of their customers will be happy paying
state income tax on dividends derived from US treasury
securities?

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Actually I do think this is a bug. I own two mutual funds
that fulfill the threshold requirements for California (i.e.
that over 50% of the assets of the mutual fund must be
invested in US gov obligations). One of them derived 100% of
it's income from treasury bills. Turbo tax for the web DID
NOT subtract the dividend from this fund from my federal AGI
when computing the CA adjustments to income.

This is a bug pure and simple.

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"Katie" <katiej_1958[at]yahoo.com> wrote:

- quote -

Turbo Tax is following the law as it is writ, this year, but
didn't for the last several years.

Apparently TT decided to change its interpretation. One
wonders why.

Anyway, thank you, Katie, for the informed and pertinent
reply.

- Don

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"A.G. Kalman" <glendale202-mtm[at]yahoo.com> wrote:

Is it possible you failed the 50% test?

Yes, Alan, as I wrote in this thread on January 31, I did
fail the 50 percent test.

And I'm not about to appeal California's 50 percent test,
now that TT started applying it. I' would, however,
participate as a member in a class action on the issue, if
someone else starts it.

- Don

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Don Enderton wrote:

- quote -

You and Turbo Tax are right, but the statute very likely
would be overturned if it were challenged in court.

Years ago, the California Franchise Tax Board took the
position that mutual funds could not pass tax-exempt
dividends through to their investors. In other words, the
income did not keep its character as tax-exempt interest
when it came through a corporate fund.

A similar issue arose in Illinois. The supreme courts of
both California and Illinois held that the rule violated the
supremacy clause of the U.S. Constitution and that the
states had to treat dividends from mutual funds as tax
exempt interest to the extent the dividends arose from
qualifying investments held by the fund. The U.S. Supreme
Court denied certiorari in the Illinois case, and the
California case was not appealed.

The litigated cases all involved funds that were invested
100% in U.S. obligations or securities issued by the state
in question. California responded to the decisions by
enacting the code section (citation provided upon request,
don't want to look it up right now) that allows the
flowthrough of tax=exempt interest only if the fund has
morethan 50% of its assets in qualifying securities. Now,
there is nothing in any of the court decisions about
percentages of investment, because it wasn't an issue. If
that issue were litigated, I think the existing statute
would be thrown out, at least as it applies to
U.S.Government interest.

But in the meantime, Turbo Tax is following the law as she
is writ.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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Don Enderton wrote:

- quote -

Not a turbo tax user. That said, California does not tax
dividends paid by a fund attributable to interest received
from U.S. obligations or California state or municipal
obligations IF at least 50% of the fund's assets would be
exempt from California tax when held by an individual. The
fund should provide a statement regarding the dividends it
pays. Is it possible you failed the 50% test?

--
Alan
http://taxtopics.net

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Responding to my own post, after studying the California
forms and instructions:

My preceding post may be too harsh, or even wrong.

Although TurboTax was indeed adjusting my California return
to show as exempt from California taxes portions of my
mutual fund earnings derived from U.S. Obligations, the
California instructions say to do this only where the
earnings from US. Government obligations equal or exceed 50
percent of the total earnings of each fund. In my case,
they don't - the highest percentage is about 22 percent.

So it could be that TurboTax finally interpreted this rule,
which has been in effect several years, differently than it
did in prior years.

That is, TurboTax may have understated my California tax in
prior years (by not following this "50 percent" rule in
prior years) instead of overstating my California tax this
year.

So I'll be conservative and assume TurboTax is correctly
applying the rule this year - it's not a large dollar
difference in my case anyway.

- Don

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The federal 2004 TurboTax, as usual, collects information
from my mutual fund dividends on what portion is earnings
from U.S. Government Obligations.

But this year California State 2004 TurboTax is failing to
make an adjustment on my state return to account for the
fact that this US Government interest reported as part of my
1099-DIV earnings is exempt from California income tax.

I'm attempting to report this bug to TurboTax (not easy to
do) but feel I should post a warning here to other
California taxpayers using the software this year. If you
not aware of the error, your taxable state income will be
overstated.

If they don't fix this bug soon a manual override to form
CA(540) is necessary, either to line 8, column B of the
"Interest and Dividend Adjustments Worksheet" or to line 9,
column B of Schedule CA(540).

This is the fourth year I've used TurboTax Deluxe, including
the state software, and I've never encountered such an
egregious error. And so late in the season, too.

I do have all the updates, federal and state, to this moment
in time.

- Don

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