I finally figured out how to resolve this issue. During the step-by-step interview for the Michigan state return, I am prompted to enter the portion of the interest and dividend income that I received while I was Michigan resident. There is note which stated "Do not include U.S. Government interest in this amount." When I excluded the interest income from US Savings Bonds, the correct state tax was computed which turned out to be zero in the case of the Michigan state return. The adjusted amount of taxable income appeared in column B of Schedule NR and the Total Household Resources Worksheet associated with the Michigan tax return. Even though the excluded amount didn't appear in line 10 of Michigan's Schedule 1, I am satisfied with this approach as way to resolve this issue.
