Hello Golf, When you buy T-Bills (Zeros) the AMD is included as 1099-INT as Box 3 income and taxed fully as interest ad the federal level but ALL states are forbidden from taxing this interest.
The problem arises when you buy T-Notes or T-Bonds below par value owing to their low interest yields. the sub par interest is reported as box 1099-INT box 3 income and treated the same way as T-Bills The glitch the occurs is that unlike T-Bills (all interest box 3), the 1099-B capital gains that occurs on these instruments is converted to ordinary interest but without box 3 checked and is fully taxed at both the federal and state levels.
This is BS, all of the income (maturity gains plus annual interest) of T-Bills and Bonds bought at discount on the secondary market is recognized by the IRS as US Treasury Interest and therefore cannot be not state taxable interest. In my case I bought deeply discounted T-Notes which yielded only $251 as box 3 interest but nearly $6000 in cap gains converted to ordinary interest. I forced the Turbo Tax state interest calculations to recognize it as such and my state tax return passed TT screening.
