How to Handle Accrued Market Discount on NJ State Tax

Accrued Interest Paid is the amount you paid to the seller of the bond due to coupon interest accrued when you buy the bond, which is included in the full coupon that will be paid to you on the next coupon date (and the full coupon is reported on 1099-INT).  Only the net amount of that coupon payment less the accrued paid is income that's taxable to you, so you would make an adjustment to reduce the interest by this amount.  To do this, report the 1099-INT boxes as provided and after the 1099-INT entry screen there are questions for other situations, check the box that you need to adjust the 1099, and then follow the on-screen instructions to enter the accrued paid, which will show as a negative "Accrued Interest" adjustment on Schedule B.  

Two caveats:

- Turbotax can't assign adjustments to specific income boxes so if your 1099-INT has multiple income types (Box 1, 3, or 😎 then you need to split up the 1099 and input the box you need to adjust separately.

- This adjustment should be done in the tax year you receive the first coupon on the bond; If the first coupon doesn't come til 2026 it's up to you to carry it over to apply against 2026 taxes.  I don't think most brokerages track this they just give you a schedule of accrued interest you paid during the year but not all of it may apply.

Accrued Market Discount (AMD) is the income you are getting from buying a bond at a discount which is then redeemed at par (100).  If you hold the bond til maturity/call then the AMD is treated at ordinary income, it's adjusted on Schedule D / Form 8949 to zero out the gain/loss and flips this amount to Schedule B.  If you sell the bond prior to maturity you may end up with a mixture of AMD (mainly) and Gain/Loss depending the timing, but that's a different topic.

As you're finding out, Turbotax does not automatically reflect AMD as a subtraction on state taxes.  There are various ambiguities and interpretations of state tax codes.  I can't speak to NJ taxability or any nuances in NJ state taxes for Treasuries, but the general way to handle this is to make a miscellaneous/manual subtraction on your state return if that is supported.  Note for NY however this type of adjustment apparently precluded e-file.

Another possible way to handle it is to add the AMD into the US Government Obligations amount on a 1099-DIV which should not affect Schedule B and would be treated as a subtraction on state tax just like a MM fund, but you would need to check the outcome of Fed and State returns (and keep records of these adjustment for audit etc) - I've not tried filing with this approach.

There's been a lot of threads on the AMD topic, and you may be able to find more specifics on NJ, for example

https://ttlc.intuit.com/community/taxes/discussion/accrued-market-discount-on-treasury-bonds-state-taxability/00/3091472

You may find it useful to build a spreadsheet for your individual bonds to track these different components, and then reconcile that Schedule B and outcome on Fed and State returns is correct as you have to add the AMD and subtract the Accrued Paid etc.

To avoid the AMD issue if you plan to buy more bonds, you can try and buy higher coupon bonds at a premium instead of lower coupons at a discount (premium amortization is tracked by brokerages and reported on 1099-INT).