I also receive muni bond interest from a USAA account. The short answer to your question is that the interest is taxable in your State. Like most States Muni Bond Interest is not taxable if the bonds are your State's Bonds. With a fund they buy bonds in funds from almost all States. When USAA sent you your Form 1099-DIV showing the Exempt interest on line 10, they also sent you a 2016 State Tax Information for USAA Tax-Exempt Income. This sheet shows all of their funds and the percentage by State for each fund. If I'm reading correctly it shows 3.36% of the 0046 Tax Exempt Money Mkt Fund was in Oklahoma Bonds, so that percentage of your interest would not be taxable on your State return. Unless you have a large amount of interest it's usually not worth the effort, so most just list the code as XX and paid the State tax on the whole amount. I hope you are as happy with USAA as most people I know.
I also receive muni bond interest from a USAA account. The short answer to your question is that the interest is taxable in your State. Like most States Muni Bond Interest is not taxable if the bonds are your State's Bonds. With a fund they buy bonds in funds from almost all States. When USAA sent you your Form 1099-DIV showing the Exempt interest on line 10, they also sent you a 2016 State Tax Information for USAA Tax-Exempt Income. This sheet shows all of their funds and the percentage by State for each fund. If I'm reading correctly it shows 3.36% of the 0046 Tax Exempt Money Mkt Fund was in Oklahoma Bonds, so that percentage of your interest would not be taxable on your State return. Unless you have a large amount of interest it's usually not worth the effort, so most just list the code as XX and paid the State tax on the whole amount. I hope you are as happy with USAA as most people I know.