Marking the ''my state doesn't tax all of this interest'' won't do anything on your federal return. But when you go to your state return, TurboTax will allow you to exclude certain interest payments. You can still adjust the interest on the state return even if you don't mark that box, but marking the box will ensure that TurboTax goes through the interest income adjustments screen on the state return. The following states have special rules for interest.
- Maine
- Maryland
- Massachusetts
- New Hampshire
- New Jersey
- Tennessee
- West Virginia
The other ''uncommon situations'' that you would need to use that screen are when you have state withholding on your 1099-INT or if you need to adjust the interest due to it being:
Nominee Interest: Some or all of the interest belongs to someone else but the entire amount was reported under your Social Security number.
Accrued Interest: You purchased a bond between interest payment dates and had to pay some up-front interest for the days you didn't own the bond.
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