Here is a workaround for when you have “Taxable Municipal Interest” (where the interest is taxable on the Federal return, but exempt on the State return) on Form 1041.

Although the amount is included with other taxable income in Box 1 of Form 1099-INT, extract the amount of Taxable Municipal Interest and enter it as Box 3 Interest on U.S. Savings Bonds and Treasury Obligations on the ProSeries Form 1099-INT Worksheet, which will give you the correct result on the tax return.  Similarly, any Bond premium reported in Box 11 of Form 1099-INT should be entered as a Box 12 item on the ProSeries Form 1099-INT Worksheet.