To enter interest that is exempt from State ONLY:
The amount you enter in Box 3 will be added to the total interest income on the Federal return, but will not be included on the State return.
To enter interest that is exempt from Federal ONLY OR Federal AND State:
You have $2,000 dollars of total interest, with $1,000 federally exempt and $300 state exempt. Enter $1000 in Box 1 of Form 1099-INT Interest Income. The $1000 that is federally exempt would be entered in Box 8. The $300 that is exempt from state taxes would be entered in the field Amount from Box 8 that is both Federal and State exempt interest.
In this example, the following interest income would be reported on the Federal and State returns:
Form 1040, Line 2a = $1,000
Form 1040, Line 2b = $1,000
State return (line numbers differ) = $1,700
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