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21 Replies New MemberExempt interest dividends are entered from Form 1099-DIV, Box 10. In other words, these dividends, when so entered into TurboTax and thus onto your actual tax return, are federal tax-exempt income.
However, dividends that represent payments from otherwise federally tax-exempt entities (but from those outside of the state of New Jersey), are an "add-back" amount onto a New Jersey tax return return, such that the federal tax-exempt dividends are taxable to New Jersey. This is in contrast to fully-taxable dividend income, which is taxable on the federal level as well as on the state level.
In practice, such federal tax-exempt, but state-taxable, dividends often come from mutual funds or Exchange Traded Funds (ETFs) that hold a multi-state portfolio of municipal bonds. All of the income from those bonds, other than than those issued within your home state, are taxable by your home state. Thus, we need to "adjust" the Form 1099-DIV, Box 10 entry to account for that fact.
In TurboTax, this is manually done in the 1099-DIV interview. Because this is usually easier to visually demonstrate than to walk through the whole process in words, we provide this answer as a series of screen-capture images, which should be relatively easy to follow. The specific numbers we use will be different than yours, obviously, but you can make the appropriate adjustment(s) to your exact circumstances. The steps we demonstrate here are for entering $1,000 of federal tax-exempt interest, where $100 remains tax-exempt in New Jersey as well, and where $900 is taxable by New Jersey.
Simply click on the image files to open.
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