Interest income received on state and municipal obligations is classified as what when computing state income tax liability?

When computing state income tax liability, the interest income received on state and municipal obligations is generally classified as an addition to taxable income. This is because many states allow taxpayers to deduct interest earned on state and municipal bonds from their federal taxable income when calculating state income tax, but when determining the taxable income for state purposes, that interest must be added back.

State and municipal bond interest is often exempt from federal income tax, which can create a situation where it’s not taxable at the federal level but must be considered when state taxes are computed. Thus, even if it’s exempt from federal taxation, states typically treat it as an addition to taxable income for local tax purposes. This classification acknowledges the importance of being transparent about all sources of income when preparing a state income tax return, ensuring that taxpayers reflect their total economic picture when calculating state liability.