I.R.S. Tax Question

[lawman]

This is my first experience at owning individual bonds. I am buying them in my Schwab Brokerage account..At the end of the year will my interest income for all bonds be totaled? Will I have to report each bond separately? If I end up with 100 bonds will that make my tax preparation difficult or complicated?

[SecondCor521]

Quote:

Originally Posted by lawman This is my first experience at owning individual bonds. I am buying them in my Schwab Brokerage account. At the end of the year will my interest income for all bonds be totaled? Will I have to report each bond separately? If I end up with 100 bonds will that make my tax preparation difficult or complicated?

Yes. No. No.

Schwab should give you a consolidated statement which should include a 1099-B for any sales, a 1099-INT for interest (including all of your bonds), and a 1099-DIV for dividends.

I think some bonds may have different rules and options about when you recognize and pay taxes on the interest. But I don't know the details.

You might also get a 1099-OID. I'm not sure about how that works tax-wise.

[lawman]

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Originally Posted by SecondCor521 Yes. No. No. Schwab should give you a consolidated statement which should include a 1099-B for any sales, a 1099-INT for interest (including all of your bonds), and a 1099-DIV for dividends. I think some bonds may have different rules and options about when you recognize and pay taxes on the interest. But I don't know the details. You might also get a 1099-OID. I'm not sure about how that works tax-wise.

Thanks...I hope to do my own next year on Turbo Tax..I'm tired of paying big bucks to someone to prepare my simple return..

[Freedom56]

Remember if you buy a bond on the secondary market you have to enter any accrued interest separately. Brokerage firms do not deduct that from your 1099-INT automatically.

[lawman]

Quote:

Originally Posted by Freedom56 Remember if you buy a bond on the secondary market you have to enter any accrued interest separately. Brokerage firms do not deduct that from your 1099-INT automatically.

That changes everything..How am I suppose to keep up with that?

[SecondCor521]

Quote:

Originally Posted by Freedom56 Remember if you buy a bond on the secondary market you have to enter any accrued interest separately. Brokerage firms do not deduct that from your 1099-INT automatically.

I've never heard of that before. Do you have an IRS reference for this where I can learn more?

[lawman]

Quote:

Originally Posted by SecondCor521 I've never heard of that before. Do you have an IRS reference for this where I can learn more?

"The price you pay for the bond will include this accrued interest. The accrued interest is taxable to the seller, whereas the interest that is earned from the date of purchase to the end of the year is taxable to the purchaser."

I guess as a buyer I would end up paying tax on accrued interest that I don't owe if that is included on my 1099..I just don't know how a seller could possibly keep up with the accrued interest.

[Freedom56]

Quote:

Originally Posted by lawman "The price you pay for the bond will include this accrued interest. The accrued interest is taxable to the seller, whereas the interest that is earned from the date of purchase to the end of the year is taxable to the purchaser." I guess as a buyer I would end up paying tax on accrued interest that I don't owe if that is included on my 1099..I just don't know how a seller could possibly keep up with the accrued interest.

Schwab will send you a "FORM 1099 COMPOSITE & YEAR-END SUMMARY"

At the coupon payment date you will receive the full amount interest payment due and for the year all your payments (CDs, bonds, money market etc..) are reported in the 1099-INT form.

Later on in the same document you will see a section called "INTEREST & DIVIDENDS" where the detail of all the interest income by individual bond, CD, account is listed. The total is what is reported in the 1099-INT form.

Then you will see a section titled "Accrued Interest Paid on Purchases" where any accrued interest paid during the purchase of a bond is listed. You have to apply this amount in your tax software where you enter your 1099-INT data.


TD Ameritrade lists this under the 1099-INT form as:

"Taxable accrued interest paid"
"Taxable accrued Treasury interest paid"
"Tax-exempt accrued interest paid" for Muni bonds


Fidelity lists this under "supplemental information" as:

"Accrued Interest Paid on Purchases"


Here is an example. You buy $100K in bonds with a coupon of 5% that pays semi-annually June 1st and December 1st during the last week of May with a settlement date prior to the first coupon payment. You are charged $2482 in accrued interest when you bought the bond. On June 1st, you receive a $2500 coupon payment for the bond you just purchased. Then on December 1st, you receive the second payment.

Your brokerage firm will send you a 1099-INT indicating $5000 was received.

They will indicate on ""Accrued Interest Paid on Purchases" the amount of $2482.

You need to enter $5000 in your 1099-INT section of the tax software along with the $2482 so the software reports only the net interest you received.

The "Accrued Interest Paid on Purchases" is not reported to the IRS. It is up to you to make that adjustment or you will overpay taxes.

I hope that clears things up.

[Freedom56]

Quote:

Originally Posted by SecondCor521 I've never heard of that before. Do you have an IRS reference for this where I can learn more?

Here is the tax software reference:

https://www.taxact.com/support/1191/...e%20tax%20year.

Please see the example above of where you get this data. This is one of those sneaky things that can cost you extra taxes if it is not completed correctly.

[SecondCor521]

Quote:

Originally Posted by Freedom56 Here is the tax software reference: https://www.taxact.com/support/1191/...e%20tax%20year. Please see the example above of where you get this data. This is one of those sneaky things that can cost you extra taxes if it is not completed correctly.

Thanks. For those wanting an IRS reference, a similar statement is in the IRS instructions for Schedule B at https://www.irs.gov/instructions/i1040sb

[gayl]

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Originally Posted by lawman Thanks...I hope to do my own next year on Turbo Tax..I'm tired of paying big bucks to someone to prepare my simple return..

I import all 1099 forms into Turbo Tax making life extremely simple.

[lawman]

Quote:

Originally Posted by Freedom56 Schwab will send you a "FORM 1099 COMPOSITE & YEAR-END SUMMARY" At the coupon payment date you will receive the full amount interest payment due and for the year all your payments (CDs, bonds, money market etc..) are reported in the 1099-INT form. Later on in the same document you will see a section called "INTEREST & DIVIDENDS" where the detail of all the interest income by individual bond, CD, account is listed. The total is what is reported in the 1099-INT form. Then you will see a section titled "Accrued Interest Paid on Purchases" where any accrued interest paid during the purchase of a bond is listed. You have to apply this amount in your tax software where you enter your 1099-INT data. TD Ameritrade lists this under the 1099-INT form as: "Taxable accrued interest paid" "Taxable accrued Treasury interest paid" "Tax-exempt accrued interest paid" for Muni bonds Fidelity lists this under "supplemental information" as: "Accrued Interest Paid on Purchases" Here is an example. You buy $100K in bonds with a coupon of 5% that pays semi-annually June 1st and December 1st during the last week of May with a settlement date prior to the first coupon payment. You are charged $2482 in accrued interest when you bought the bond. On June 1st, you receive a $2500 coupon payment for the bond you just purchased. Then on December 1st, you receive the second payment. Your brokerage firm will send you a 1099-INT indicating $5000 was received. They will indicate on ""Accrued Interest Paid on Purchases" the amount of $2482. You need to enter $5000 in your 1099-INT section of the tax software along with the $2482 so the software reports only the net interest you received. The "Accrued Interest Paid on Purchases" is not reported to the IRS. It is up to you to make that adjustment or you will overpay taxes. I hope that clears things up.

Thanks for the detailed explanation...

[COcheesehead]

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Originally Posted by gayl I import all 1099 forms into Turbo Tax making life extremely simple.

Yep, me too.

[lawman]

Quote:

Originally Posted by gayl I import all 1099 forms into Turbo Tax making life extremely simple.

Does importing those forms solve the problem of accrued interest paid?

[Freedom56]

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Originally Posted by lawman Does importing those forms solve the problem of accrued interest paid?

No it does not. For whatever reason, from Schwab, Fidelity, and TD Ameritrade the "accrued interest paid" does not import with the 1099-INT data. If you have tax free muni bond interest, it doesn't matter but if you have taxable interest you will end up overpaying if you don't enter it manually. I noticed this issue when my interest income at year end on my financial tracking software (MS Money) was not matching what was being imported by my tax software. I contact the technical support and was informed that accrued interest paid has to be entered manually and does not import. I was using HRB Tax software.

[lawman]

Quote:

Originally Posted by Freedom56 No it does not. For whatever reason, from Schwab, Fidelity, and TD Ameritrade the "accrued interest paid" does not import with the 1099-INT data. If you have tax free muni bond interest, it doesn't matter but if you have taxable interest you will end up overpaying if you don't enter it manually. I noticed this issue when my interest income at year end on my financial tracking software (MS Money) was not matching what was being imported by my tax software. I contact the technical support and was informed that accrued interest paid has to be entered manually and does not import. I was using HRB Tax software.

Will Turbo Tax prompt you for the information?
Since accrued interest is not reported I wonder how many sellers pay the tax..

[Freedom56]

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Originally Posted by lawman Will Turbo Tax prompt you for the information? Since accrued interest is not reported I wonder how many sellers pay the tax..

I couldn't tell you. I have not used Turbo Tax for many years. But here are the instructions:

Select Federal Taxes
Under Wages & Income select Interest on 1099-INT
Enter your 1099-INT information, select Continue
Select I need to adjust the taxable amount, select Continue
Enter the accrued interest paid in the Adjustment box

[jebmke]

Setting aside the accrued interest question, there may also be amortization of premium or discount if the bond is not purchased at par value (likely). I believe that the brokers calculate this for you, though -- but I don't buy individual bonds in taxable accounts so I can't tell you from experience.

[lawman]

Quote:

Originally Posted by Freedom56 Schwab will send you a "FORM 1099 COMPOSITE & YEAR-END SUMMARY" At the coupon payment date you will receive the full amount interest payment due and for the year all your payments (CDs, bonds, money market etc..) are reported in the 1099-INT form. Later on in the same document you will see a section called "INTEREST & DIVIDENDS" where the detail of all the interest income by individual bond, CD, account is listed. The total is what is reported in the 1099-INT form. Then you will see a section titled "Accrued Interest Paid on Purchases" where any accrued interest paid during the purchase of a bond is listed. You have to apply this amount in your tax software where you enter your 1099-INT data. TD Ameritrade lists this under the 1099-INT form as: "Taxable accrued interest paid" "Taxable accrued Treasury interest paid" "Tax-exempt accrued interest paid" for Muni bonds Fidelity lists this under "supplemental information" as: "Accrued Interest Paid on Purchases" Here is an example. You buy $100K in bonds with a coupon of 5% that pays semi-annually June 1st and December 1st during the last week of May with a settlement date prior to the first coupon payment. You are charged $2482 in accrued interest when you bought the bond. On June 1st, you receive a $2500 coupon payment for the bond you just purchased. Then on December 1st, you receive the second payment. Your brokerage firm will send you a 1099-INT indicating $5000 was received. They will indicate on ""Accrued Interest Paid on Purchases" the amount of $2482. You need to enter $5000 in your 1099-INT section of the tax software along with the $2482 so the software reports only the net interest you received. The "Accrued Interest Paid on Purchases" is not reported to the IRS. It is up to you to make that adjustment or you will overpay taxes. I hope that clears things up.

I'm looking at my 2021 Form 1099 Composite for Interest Income from Schwab. There is no line item for accrued interest paid on purchases. Any idea where that information is given?

[SecondCor521]

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Originally Posted by lawman I'm looking at my 2021 Form 1099 Composite for Interest Income from Schwab. There is no line item for accrued interest paid on purchases. Any idea where that information is given?

I'm not @Freedom56, but in your original post you mentioned that you just started buying bonds this year. I would imagine that if a section of the tax forms don't apply to you, Schwab just leaves it out. It'll probably show up in your 2022 composite 1099 that you receive about seven months from now.