First, the State is correct: the amount on your W-2 in box 12 with a code of DD should not be deducted separately on your state return, because the code DD amount was already removed from the federal Wages on your W-2 and therefore did not carry to your state income anyway.
I see a number of possibilities:
1. The W-2 was not imported correctly. On occasion, the auto-import feature to import a W-2 fails. This can cause TurboTax to be confused as to what was actually on your W-2 and possibly make erroneous entries in your state return. The auto-import feature is most likely to fail if the company that created your W-2 data packet did so incorrectly or if the import got garbled in the process of transmission.
2. You entered this number someplace in the Iowa interview. I know you said you didn't enter it manually, but it's still a possibility.
3. The number that the State flagged actually wasn't the code DD amount, but was something else that happened to be the same number so the State mistook it. IN this case, the number might be correct, for a different reason.
On what line did this dollar amount appear on your Iowa return? That would help everyone understand how the number got there.
Although none of these possibilities is particularly likely, they are something to look for as you review your return. Then contact the people that Critter referred to above so that you can be ready for the conversation.
