Heads Up: TurboTax + Fixed Income + Accrued Interest

[njhowie]

This topic has come up in the past, and I wanted to reiterate it now since we are in tax season, and I caught my error after filing...so now need to file an amended return to get some money back.

If you purchased any secondary market bonds, secondary market brokered CDs, or secondary market Treasuries in 2023, be aware and double the calculations your tax software is doing on any accrued interest you paid (interest paid on purchase to prior owner for partial period interest earned). If the calculations are not done correctly, you may be paying taxes on interest you have paid out.

As was also mentioned in a prior thread, if you import from Fidelity into TurboTax, it will correctly capture your 1099-INT information, but it does not bring in the Accrued Interest Paid on Purchases. If you open your Fidelity tax statement PDF, it will be shown in a section for "Accrued Interest Paid on Purchases" on the last page if you purchased/paid.

To handle it correctly, you need to go into the 1099-INT(s) in TT, go to the details, and then click to add adjustments. On one of the next screens it presents an entry for the adjustment amount and a list of checkboxes to indicate what the adjustment amount refers to and one of the entries is for Accrued Interest included in Interest Total (or something to that effect). When you do that, TT will deduct the accrued interest amount on the interest, and then in the Schedule B details you'll see a line added for Accrued Interest with the negative amount.

If this affects you and you're still with me, wonderful. I'm now going to add an additional problem, as it appears that there is a bug in TurboTax...if on your 1099-INT you have an entry in Box 11 and/or Box 13 for Bond Premium/Bond Premium on Tax Exempt Bonds. In this case, the bug is that TT does not carry the accrued interest to the state return. I noticed this as I was editing the 1099-INTs, adding the accrued interest entry and while my Federal refund was increasing, the state was not. Through some trial and error I narrowed it down to this. So, if you have to add the accrued interest adjustment, and you see that Box 11/13 has entries, to correct you need to manually create a new 1099-INT just for holding the accrued interest adjustment amount, with nothing other than the Box 1 interest filled in. Lower the original 1099-INT interest amount(s) by the accrued interest amount, and then on the new 1099-INT, make the interest amount the same as the total accrued interest amounts (from all 1099-INTs), and indicate the accrued interest adjustment amount for this new 1099-INT as previously described above. In this case, you would enter all accrued interest on this new 1099-INT, and no adjustments on the original - just lowering the interest amount by the accrued interest amount. Remember, Fidelity will generate a 1099-INT for each individual account, so you may need to do this for multiple 1099-INT forms imported. I have posted about this in the TT community forum hoping for a response from Intuit or other tax professional on the site, but nothing has come back yet. Regardless, the approach I discussed here will resolve the situation in an acceptable fashion.

If this affects you and I was not clear on any of the above, please speak up and I will communicate it better.

If you do not have any Accrued Interest on Purchases, forget everything you just read.

 

[MichaelB]

Thanks for the heads up, That may be an issue for me, I’ll check later this morning.

 

[jazz4cash]

I’ll be watching out for how HR Block handles this. As I recall it queries for accrued interest paid but the bond premium issue is unfamiliar to me. Thanks Howie.

 

[Spock]

Sigh. I was planning on using TT to import data from Fido in order to avoid exactly this issue.
Thanks for the info on how to work around for the fed return.
Fortunately for me I only have to do a partial year state tax return this year and the amount of interest in question is probably not worth jumping through hoops on the state return.

 

[MichaelB]

On checking my taxes i found accrued interest was not adjusted as njhowie informed. When I input the number as he suggests another TurboTax issue arises. We have taxable and tax exempt interest and it is applying the accrued interest to all in a prorated manner. This is wrong, it’s all taxable only. So, I will need to go back to the Fidelity 1099-int data, separate the taxable and tax exempt and renter them as if they were separate 1099’s.

Thanks to njhowie for a most helpful tip.

 

[sakowitzm]

njhowie: Thanks very much for this. I just saw it and will dive into it later today. But first a quick question - on the second part, where you get into state taxes ---> I only had Treasuries and Virginia does not tax the interest on Treasuries. So does that part affect me? Or can I stop reading after the first four paragraphs?

Thanks!
m

 

[joesxm3]

just marking so I can find it later. Probably does not apply. But scary enough to want to keep track of this thread.

 

[njhowie]

njhowie: Thanks very much for this. I just saw it and will dive into it later today. But first a quick question - on the second part, where you get into state taxes ---> I only had Treasuries and Virginia does not tax the interest on Treasuries. So does that part affect me? Or can I stop reading after the first four paragraphs?

Thanks!
m

If your 1099 does not show any entries for Box 11 or 13, then you don't have to be concerned with this.

In TurboTax, if you are manually entering the information, there is a checkbox to indicate the interest is from Treasury securities which make it tax exempt at the state level.

To be safe, I recommend verifying the TurboTax PDF files prior to filing to check that realistic values are flowing to the correct form entries. If something looks off, then go back and pick things apart.

 

[Born2Fish]

Glad you posted!

After reading your post I looked through my Fed/State Tax returns, that I filed yesterday using Turbotax, and discovered a duplicate 1099-INT entry for an iBond that I redeemed.

Amended Fed and State and sent them off.

Saved $460 on Fed/State combined.

I noticed that the Turbotax results were higher than the calculator but was burned out and could not find the error. Lesson learned (I hope). I should have shut down for the day and looked at TT results this morning.

 

[audreyh1]

Yeah, we give things a couple of days to “settle” before submitting. Also check for updates again and no 1099 status changes.

 

[gauss]

Fidelity's Brokerage Statement (1099-xxx) for my after tax account clearly showed Accrued Interest paid on bond purchases. That being said, it was not on the 1099 section, but rather on the supporting pages near the end.

Once again, you have to know what the answer should be before trying to use tax prep software. IMHO, The ads that convey the message that if you buy their tax prep software products, then you don't need to know or worry about anything are disingenuous.



-gauss

 

[jazz4cash]

Accrued Interest Timing

.

Once again, you have to know what the answer should be before trying to use tax prep software. IMHO, The ads that convey the message that if you buy their tax prep software products, then you don't need to know or worry about anything are disingenuous.

-gauss

So true!

I just realized (from another thread) that there is also an issue with timing of the accrued interest payment.
How To Handle
If I bought a bond/CD in Dec ‘23 and paid accrued interest but did not receive any coupon payments for ‘23, how do I handle deducting the accrued interest I paid to the seller? Will broker even send 1099 if I don’t have other bonds/CDs with coupon payments?

 

[gauss]

So true!

I just realized (from another thread) that there is also an issue with timing of the accrued interest payment.
How To Handle
If I bought a bond/CD in Dec ‘23 and paid accrued interest but did not receive any coupon payments for ‘23, how do I handle deducting the accrued interest I paid to the seller? Will broker even send 1099 if I don’t have other bonds/CDs with coupon payments?

In my case, I had paid accrued interest for 2 bonds purchased in 2023. One had actually paid an interest payment and the other has not paid an interest payment yet (to me).

Fidelity reported accrued interest in 2 places. One location was a summarized total. The other location was itemized for each bond.

In my case the accrued interest INCLUDED the bond that had not a coupon to me yet.

Fidelity also creates (but does not report to the IRS) De Minimis 1099's.

These are the cases where you do have an obligation to pay tax on interest/dividends etc, but they do not rise to the level of requiring reporting to the IRS (ie typically less than $10).

Overall I was very impressed with Fidelity's handling of tax reporting documents this year. They even got the 1099-OID "right" for the zero-coupon STRIPPED U.S. Treasury bonds that I purchased on the secondary market.

-gauss