Your exact steps my differ from mine, although I can explain my steps.
In my test, I left the state distribution as zero in the federal interview, continued to answer the questions to get to the NYS pension selection where I also entered zero for the New York Distribution Amount.. At this point the NY state return shows the distribution as taxable on the IT-201. I did not have an adjustment on line 26.
If I go into the 'Received retirement income' to enter the full amount as nontaxable, then the adjustment is placed on Form IT-201, line 26, removing the income from the return.
I would have expected to have zero flow to the NY state return, except that they want to see the adjustment on their return.
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