I may not have been clear. Let's step back and separate the two issues.
In a discussion with the NJ Division of Taxation about a different topic, the person pointed out that in
NJSA 54A5-1 which defines NJ gross income, paragraph e uses the term "interest" and NOT "net interest".
So if you read that to mean "gross interest" which the NJ Taxation person does, the amortized bond premium is NOT deductible from NJ taxable interest. It however is deductible from federal taxable interest. Turbotax and other tax programs bring the net interest down from federal Schedule B and use that as NJ taxable interest.
That would be incorrect according to the NJ Taxation person and you would need to adjust the NJ taxable interest by adding back the amortized bond premium. So Turbotax may not be in compliance with NJ tax regulations.
I have not heard or read about this in the NJ instructions or any where else about this interpretation, so
I was looking for confirmation.
As a numerical example if you bought a premium bond at 105 and it matures at 100, both NJ and federal would use 100 as the adjusted cost basis, so no gain or loss. But in NJ, you lose out in deducting 5 points over the holding period of the bond from your taxable interest.
The second issue was not discussed with NJ Taxation, but my concern was if we extend the net interest concept to the accrued interest paid when purchasing a bond between coupon dates, then a similar problem arises. Accrued interest paid in purchasing a bond is deductible from federal taxable interest in the year paid on federal Schedule B. Would accrued interest paid need to be added back for NJ taxable interest?
These would both be bad for NJ taxpayers.
If audited, I would be happy to blame TurboTax.
