This is the subtraction (page 14 of the AZ Instructions:(
C. Federally Taxable Arizona Municipal Interest as Evidenced by Bonds
Include the amount of any interest income received on
obligations of the State of Arizona, or any political subdivisions
of Arizona, as evidenced by bonds, and is included in your
Arizona gross income. Do not enter any Arizona municipal
interest that is exempt from federal taxation and not included in
your federal adjusted gross income.
"All of my municipal interest (tax-exempt) was not included in Federal AGI. " - do you mean that none of your municipal interest was in the Federal AGI? Was this interest from Arizona or elsewhere?
"This adjustment doesn't make any sense." - what doesn't make sense about it? Arizona does not tax interest from Arizona state or local subdivisions; however, frequently bonds from Arizona municipalities are tax-free at the federal level, so it makes no sense to deduct them again in Arizona when they aren't in federal income anyway.
Make sense? Or are you asking where the number listed under Subtractions came from?
If you are using the CD/download software, you can use Forms mode to look at the worksheets under Arizona to find the worksheet that describes where this subtraction comes from.
If you are using the Online product, you will not be able to see the worksheets until you pay for the return.
**Mark the post that answers your question by clicking on "Mark as Best Answer"
None of my municipal interest was in Federal AGI. That's why it didn't make sense that TurboTax subtracted interest on my Arizona return that wasn't in the starting Federal AGI number.
The municipal interest was both Arizona and non-Arizona. I identified the amount of non-Arizona muni interest and that was added into my Arizona AGI -- which makes total sense.
I must have answered something incorrectly to have Turbo-Tax put in that Arizona subtraction but I couldn't figure out where. So I just over-rode the number on the form and changed it to $0 and the Arizona return came out just as I expected.
Thanks for taking the time to respond to my question. It confirms what I did.