I'm not going to debate if it is state taxable or not, but if you decide that it is exempt from state taxes, here is how to do this for California:
Go to CA Investments section, then Interest and Dividend Adjustment section. The first screen shows specific items. Don't edit anything and continue. Now you are in the "Other Interest" section. Add something like the following to the Description and Subtraction columns:
Description: "Accrued Market Discount on T Note XXXXX"
Subtraction: 1234.00
