I agree with Hal_AL on the best practice being to use box 3 of the 1099-INT. However, any method that gets the job done with the proper tax, is good. The key is that if you are ever audited, you can show why you made the deduction and have the proof. At the end of the day, the state just wants to be sure they have received the full tax due and you have received all credits and deductions to which you are entitled.
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