Get your taxes done using TurboTax

Once your 1099-INTs are downloaded, report the accrued interest as an adjustment shown below.  There you can make your adjustment for the portion of accrued interest you paid at purchase.  You are not required to report this portion as interest income.  Instead you add it to the cost basis of your bonds.

Since you are reporting Interest income on a bond that had accrued interest at the time you purchased, then you would reduce your interest income by the accrued interest at your purchase date. Enter the full amount of the interest, and then enter the accrued Interest paid as an adjustment to reduce it. 

Open your TurboTax return:

1. Search (upper right) > Type 1099int > Click on the Jump to... link
2. Enter your interest income > Continue > Select 'I need to adjust the interest reported on my form'
3. Enter the adjustment amount (accrued interest at purchase) > Select 'My accrued interest is included in this 1099-INT'
4. This will accomplish the correct taxable income for your return.