@VolvoGirl - Your reply addresses my point #1. But the point #2 in my post is still an issue. The market discount from treasuries is from the 1099-B and so there is no way to indicate tax exempt in the federal screens. They are taxable at federal level but not at NJ because they are treated as treasry bond interest. How can I exclude those in the NJ return?
One workaround I have is I can offset market discount amount in any one of the 1099-INT I have in the federal flow by putting that amount in box 3 and subtracting it from box 1. This should not impact the federal taxes but will exclude the market discount from NJ return. Not sure if that would cause problems though with the IRS.
