When entering/reviewing a form 1099-INT, TurboTax allows entry of an adjustment for accrued interest that was part of the bond's purchase price. But it does not allow a way to indicate if it applies to taxable interest (box 1) US government interest (box 3) or exempt interest (box 8).
I experimented, and found the 2022 desktop version of TurboTax does the following.
If the 1099-INT shows interest only in box 1 or 3, TurboTax appears to reflect the adjustment as a separate line on Schedule B. This is the correct procedure according to "Accrured Interest on Bonds" in Publication 550. However you would have to be careful that the adjustment is correctly reflected on a state tax return, since the state may tax regular and US government interest differently.
If the 1099-INT shows interest only in box 8, TurboTax reflects the adjustment (a positive amount) by subtracting it from 1040 box 2a. This seems sensible. Note that the amount in box 2a can be critical for people with Medicare since it contributes to modified adjusted gross income (MAGI) and small differences can severely impact your premiums.
If the 1099-INT shows interest in more than one of boxes 1, 3 and 8 (which is not uncommon for a brokerage account) it is not at all clear how TurboTax could make a proper adjustment. Perhaps the TurboTax team can explain better how this would be handled, and improve the software to allow the user to specify a separate adjustment for each type of interest.
