You will actually report this as an interest payment. I found this Turbo Tax link that outlines how to report this step by step..
- Select Federal Taxes
- Under Wages & Income select Interest on 1099-INT
- Enter your 1099-INT information, select Continue
- Select I need to adjust the taxable amount, select Continue
- Enter the state that pays your tax-exempt interest, select Continue
- Enter the amount of your premium adjustment as a positive number
- Select the Reason for Adjustment
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