There seems to be a lot of confusion in the thread about who pays interest. If you buy a treasury on the open market or from the feds and hold it to maturity, 100% of all income generated from that bond/note is 100% treated interest income by the Feds and may not be taxed at the state level and for notes that have coupons, any interest payments you receive after purchasing the bond is paid by the Feds, not the seller you bought the note from.
If you sell a bond on the open market, the buyer pays you're accrued interest. This is NOT exempt at the state tax level. Given the amount of confusion by undoubtably very smart people in this thread, I have to wonder how many paid tax preparers are getting this wrong.
I found this thread because etrade's 10990-B shows an Accrued Market Discount despite that fact that I held every treasury to maturity. TurboTax did not do the right thing when transferring this to my 540 so now I have to step in and fix it. What's worse is that last year I did not catch this but it was a much smaller amount. I caught it this time because the difference was enough to notice that my state taxes owed were not adding up.
