You will still report the income on your federal tax return. Tax-Exempt Interest is reported in Box 8 of Form 1099-INT, Interest Income. See the screenshot attached below for where to include this in TurboTax.
You will not pay federal tax on non-taxable income. TurboTax will carry the same interest income to your New York state tax return and include it as taxable income on that return.
See the TurboTax FAQ below for steps on entering your interest income. Click "See entire answer" for the full page view.
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