"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.