Generally (with many exceptions probably not pertinent here):
Interest on federal obligations is taxable on the federal return, but exempt from taxation by the states.
Interest on municipal obligations is not taxable on the federal return; treatment by the states varies greatly.
The federal exemption (Sec. 103 of the Internal Revenue Code) is not just generosity on the part of Congress, and it is not primarily for the benefit of the individual or other recipient of the interest. Such interest on "the obligations of a State, a Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia..." (as it read before 2006) is excluded from the definition of Gross Income so as not to burden the state or subdivision, such as a city, county, school district or other special district. If the municipality had to issue only taxable bonds, then it would have to pay a higher interest rate to compete with corporate bonds, and it would have to tax its citizens more heavily to pay the higher interest. So the tax relief is intended for the state or municipality and its citizens; the recipient of the interest payments is only an incidental beneficiary.
In your specific case, I'd say that TurboTax got it right.
But remember, I've been retired a long time. I didn't even know about the recent amendment to Sec. 103 until I looked it up online today
formatting link
So be sure to check with your own CPA. RC