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Enter all of your income information in the Federal section of TurboTax; then, when you start the California return, TurboTax provides a screen that lists the types of income that are treated differently for California. Review the list, make any needed entries, and complete the follow-up questions to get an accurate result.
Most all interest income earned on municipal bonds is exempt from federal income taxes. When you buy muni bonds issued by the state where you file state taxes, the interest you earn is usually also exempt from state income taxes. If you buy muni bonds issued by another state, you'll still typically avoid federal taxes, but you'll likely be subject to state (and possibly local) income taxes.
Box 8 of Form 1099-INT reports tax-exempt interest and relates to interest-bearing investments you hold with state and local governments, such as municipal bonds.
Although the tax-exempt interest reported in box 8 of the 1099-INT isn’t taxable, you still need to report it on the “tax-exempt interest” line of your tax return for informational purposes and for certain other tax calculations.
See this TurboTax tips article and this one for more information.
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