In a situation like this, you can enter the interest as taxable on the federal return, then enter an adjustment in "Other Income" to reduce the otherwise taxable interest back down to zero.
In TurboTax, go to the "Income and Expenses" section, then "Less Common Income", then "Miscellaneous Income" and then "Other Reportable Income". You enter a description for the adjustment (Adj for exempt interest) and enter the adjustment as a negative figure.
On your state return, you should see an option to remove the adjustment so your state return will pick up the interest as taxable.
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