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PUERTO RICO BOND INTEREST TAXABLE FOR CALIFORNIA

November 29, 2016 • John Tapp • Log In to Post Comments

FOR YEARS PUERTO RICO BOND INTEREST HAS BEEN CONSIDERED TAX FREE FOR CALIFORNIA. OUR CLIENT'S RETURN WAS CHANGED BY THE FTB WHILE ELECTRONICALLY FILING THE RETURN.  THE CHANGE WAS NOT NOTICED UNTIL THE CLIENT RECIEVED ASSESSMENT OF $5,200 ON WHAT SEEMED TO APPEAR TO BE AS TAXING ON PUERTO RICO BOND INTEREST.

THE BROKER FOR CLIENT INSISTS PUERTO RICO BOND INTEREST IS TREATED AS TAX FREE FOR FEDERAL & CA PURPOSES.  

A RESEARCH OF THE CA REV & TAX CODE INDICATES TO ME THAT PUERTO RICO BOND INTEREST IS TAXABLE FOR CA.  CLIENT IS A RESIDENT OF NEBRASKA.

ANY THOUGHTS ON THIS FOR THE FOLLOWING:

1. WHY DID CLIENT NOT RECIEVE TAX NOTICE OF TAX CHANGE ON THE E-FILED RETURN?

2. MY BRIEF "LOOK-UP" ON PUERTO RICO BOND INTEREST SEEMS TO INDICATE THAT THE INTEREST IS TAXED FOR CA.  -  THERE SEEMS TO HAVE BEEN A CHANGE IN CA TAXABILITY IN 1999 - (Amended by Stats. 1999, Ch. 987, Sec. 25. Effective October 10, 1999.)

 

https://www.fulleredu.com/taxblog/california-adjustments-to-federal-taxation-of-interest-income/

 

The first and most important difference between federal and California treatment of interest income relates to interest from bonds and other obligations of the United States government. Under federal law, California (and all other states for that matter) is explicitly prohibited from taxing interest from “obligations of the United States”.[1] This includes interest from U.S. treasury bonds and interest on any other debt owed to the taxpayer by the U.S. government or the government of a U.S. territory or Puerto Rico.[2] Thus, although the federal government requires the taxpayer to include interest from U.S. bonds and obligations in taxable income on their federal tax return, the amount of such interest will be subtracted from the taxpayer’s taxable income on their state return (see below).

 

  1. See California FTB Form 540 Schedule CA Instructions (2014), p. 2.

 

 

On the other hand, although the federal government does not tax interest from state and municipal bonds,[3] the state of California does tax such income under Cal. Rev. & Tax. Cd. § 17143, which essentially states that California does not follow the federal rules for treatment of state and municipal bond interest income.[4] Rather, California taxes all state and municipal bond interest that is from any government other than the state of California or a municipality in California.[5] Therefore, all interest income from non-California state or municipal bonds must be added back to the taxpayer’s taxable income on their state return (see below).

 

Universal Citation: CA Rev & Tax Code § 17143 through (2015) Leg Sess

17143. Sections 103 and 141 to 150, inclusive, of the Internal Revenue Code, relating to interest on governmental obligations, shall not apply.

(Amended by Stats. 1999, Ch. 987, Sec. 25. Effective October 10, 1999.)

 

 


Comments

Hi John.  As to the first question, the FTB is not able to match the 1099 information at the time the return is e-filed.

As to the second question, according to the facts you've presented  the interest on the Puerto Rico bonds would not be subject to California personal income tax for two reasons
 
1)  The taxpayer is a nonresident and therefore the interest would  not be subject to CA tax (R&TC Sec. 17041); and
 
2)  According to the Schedule CA (540) instructions, CA exempts all interest from bonds and obligation of the U.S. and its territories.  There is nothing listed on the Schedule CA (540) instructions that would require an exception for Puerto Rico bonds. The amendments made to R&TC Sec. 17143 were strictly technical in nature and had no impact on the treatment of interest from federal obligations.

 

 

Thank so much to you and all the Spidell Team !!!!! Lov you guts!

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