It appears that this is a flaw in TurboTax that does not allow me to receive this deduction on my state taxes.
Well...it appears to do so properly for my NC tax return. I can't know that it transfers properly to all state's software.
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1) You enter/edit your 1099-DIV where a portion of box 1a was from US govt dividends/interest.
2) You enter all the data in all the boxes shown on the 1099-DIV.
3) as you "Continue" on to a page after the main set of box entries, you have a checkbox page where you check a box for "A portion of these dividends is US Government interest"
4) when you "Continue" from that page, there will be an entry you can make for entering the sub-portion of box 1a that represents US Govt interest received by the mutual fund(s) you hold. You do have to calculate the exact $$ amount yourself from the data your mutual fund(s) provide.
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You may have to print out your state forms to see where it is removed...or perhaps not transferred to the state forms in the first place....but I suspect most states it will be a state income deduction somewhere in there.
It works fine for me in California. I have Vanguard funds and you do have to do some multiplying first using the extra US government obligations income information sheet and also the Tax-exempt interest sheet. I did make myself a little spreadsheet.
@SteamTrain said "You do have to calculate the exact $$ amount yourself from the data your mutual fund(s) provide."
That is, you want find that info (the amount of dividends/interst from US Gov't obligations) on the 1099-DIV or the 1099-INT. If the mutual fund did not provide that on a separate piece of paper, you may have to go looking for it at the mutual fund web site.