Market discount is the difference between what you paid for a bond, and the maturity redemption price.  If you bought a $1000 bond for $950, your market discount is $50.  This discount must be included in your income, as interest, either over the period you own the bond, or when it is sold.  In box 1f your broker is reporting the accrued amount of discount over the time you held the bond. TT will show it as interest income on Sch B (look and see if it's on that form), and then subtract the same amount from your gain on the sale, since it's already been reported elsewhere.  Hope this helps.

Thanks TaxLady.  That makes sense and TT is doing that for my Federal return.  However, when TT prepares my NJ state return (based on information in the Federal return), the accrued market discount is not being included in the "Taxable Interest Income"line and the accrued market discount is still being subtracted from my Schedule B gain on sale line. So, it seems like I'm under-reporting taxable income for my NJ state return.  It seems like this is a TT error!

Thanks,
Robert

I think you're right.  It sounds like TT is not carrying the Interest properly to the state.