Get your taxes done using TurboTax
If some of your tax-exempt interest falls under the definition of accrued interest, it must be taken into account by subtracting accrued interest from the total tax-exempt interest to arrive at the amount of tax-exempt interest that is attributable to the purchaser.
If you need to adjust for accrued interest, and have both taxable and nontaxable interest on the same Form 1099-INT, then you should enter the taxable and nontaxable interest in TurboTax as if they were two separate 1099's in order to subtract the accrued interest from the correct income. You generally shouldn't override numerical entries in TurboTax, as it may invalidate the accuracy guarantee.
From the Instructions for Schedule B:
Enter the total on line 2a of your Form 1040 or 1040-SR. However, if you acquired a tax-exempt bond at a premium, only report the net amount of tax-exempt interest on line 2a of your Form 1040 or 1040-SR (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year).
In TurboTax, if you indicated when entering the 1099-INT that you need to adjust the interest, you will see this follow-up screen:
Choose the appropriate Reason for Adjustment (such as accrued interest, etc.). See the highlighted section if your form contains more than one kind of interest. In that case, create a separate 1099-INT for each type so that the adjustment is applied to the appropriate type of interest.
If you received any tax-exempt interest (including any tax-exempt OID), such as from municipal bonds, each payer should send you a Form 1099-INT or a Form 1099-OID. In general, your tax-exempt stated interest should be shown in box 8 of Form 1099-INT or, for a tax-exempt OID bond, in box 2 of Form 1099-OID, and your tax-exempt OID should be shown in box 11 of Form 1099-OID.
If the calculation of the accrued interest isn't clear from the documents you were provided, contact the payer.
Regarding the excess bond premium/ accrued interest: on certain bonds (such as bonds that pay a variable rate of interest or that provide for an interest-free period), the amount of bond premium allocable to a period may exceed the amount of stated interest allocable to the period. If this occurs, treat the excess as an itemized deduction on your Schedule A (Form 1040). However, the amount deductible is limited to the amount by which your total interest inclusions on the bond in prior periods exceed the total amount you treated as a bond premium deduction on the bond in prior periods.
If any of the excess bond premium can't be deducted because of the limit, this amount is carried forward to the next period and is treated as bond premium allocable to that period. If there is a bond premium carryforward as of the end of the accrual period in which the bond is sold, retired, or otherwise disposed of, treat the carryforward as an itemized deduction on your Schedule A (Form 1040).
See IRS Pub. 529 and IRS Pub. 550 for more information.
