I was unable to re-create this issue, can you provide some details, and what state return(s) you are filing? @Greg Brown
The accrued interest is taxable to the seller, whereas the interest that is earned from the date of purchase to the end of the year is taxable to you. However, at year-end, you will receive a Form 1099-INT Interest Income showing the total interest received during the tax year. This total interest amount will include the accrued interest that is taxable to the seller and the interest that is taxable to you. Therefore, you must note the portion of this interest income that is accrued interest, which is then deducted from your total interest to show the amount attributable to you.
If the interest is tax-exempt, then the total interest is not taxable; however, if some of the tax-exempt interest falls under the definition of accrued interest as mentioned above, it must be taken into account. The amount of tax-exempt accrued interest must be subtracted from the total tax-exempt interest in order to find the amount of tax-exempt interest that is attributable to you.
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