I didn't realize zero coupon bonds get taxed yearly

[UpQuark]

I thought being one's own FA was supposed to be easier than it has been for me, sighhhh.

In my uneducated state I thought that zero coupon and coupon bonds worked (tax-wise) like TIPS and i-bonds, specifically I thought the interest from zero coupon bonds didn't get taxed until the maturity date.
But yesterday I noticed that Fidelity is predicting three more weeks before one of my accounts gets a 1099, and the info specified that it was waiting for info for a particular zero coupon bond.

I also just realized that I have probably been paying state tax on all of SPAXX dividends because I didn't know about an online letter and the category to look for to see what percentage is from U.S. gov obligations.

And I found that my state (Maryland) has a list of which Fed Agency bonds interests can be deducted and which can't -- though I'm very confused by the bond names, the MD tax document uses words like 'home loan bank' but when looking at bond names they use words like 'home loan baser', what's a baser'?

Does anyone know of a simple investment tax guide, concise, not confusing, maybe written at the fifth grade level (or at least not written like tax documents)?

Do you have any helpful tax hints that you've learned?

 

[Gumby]

...... I thought that zero coupon and coupon bonds worked (tax-wise) like TIPS and i-bonds, specifically I thought the interest from zero coupon bonds didn't get taxed until the maturity date.
But yesterday I noticed that Fidelity is predicting three more weeks before one of my accounts gets a 1099, and the info specified that it was waiting for info for a particular zero coupon bond.
.......

Do you have any helpful tax hints that you've learned?

This is one of the reasons our treasury ladder is in our tIRAs and Roths, so we don't have to keep up with the imputed interest issues. Part of my drive to simply our finances.

 

[audreyh1]

Interest gets taxed taxed whichever year it is paid. Zero coupon T-bills don’t go past 52 weeks in duration, and interest is paid when they mature. Treasuries longer 52 weeks pay coupon interest every year. So there is some other zero coupon treasury your FA put you in?

TIPS should be held in a tax-deferred account due to imputed interest. These also pay coupons.

 

[MichaelB]

Does anyone know of a simple investment tax guide, concise, not confusing, maybe written at the fifth grade level (or at least not written like tax documents)?

Do you have any helpful tax hints that you've learned?

Not sure such a tax guide exists. I sure haven’t seen one. “Simple” and “tax” are like oil and water, they don’t go well together.

The only helpful advice I can give is to assume everything will be taxed yearly and to never invest in an asset without first learning how it will be taxed.

 

[Koolau]

Yeah, I just try to avoid taxable stuff other than in my 401(k) and Roths.

It's not so much that I mind paying taxes as I hate the complicated structure of some taxable stuff.

MichaelB's advice is excellent - and reminds me of my cardinal rule. If I don't understand it I don't invest in it. Best luck going forward.

 

[bjorn2bwild]

And I found that my state (Maryland) has a list of which Fed Agency bonds interests can be deducted and which can't -- though I'm very confused by the bond names, the MD tax document uses words like 'home loan bank' but when looking at bond names they use words like 'home loan baser', what's a baser'?

Short answer - baser is an acronym of BAnk SERial number.
When doing my research, I was satisfied that the FHL baser bonds I was looking at were state and local tax exempt(CA), although I have not yet received my 1099's to confirm.

Edit, I am a member of the Fidelity subReddit and the answer there is that 'baser' is an abbreviation rather than acronym, used to shorten the bond description in order to meet character limitations in the listing.

 

[UpQuark]

Interest gets taxed taxed whichever year it is paid. Zero coupon T-bills don’t go past 52 weeks in duration, and interest is paid when they mature. Treasuries longer 52 weeks pay coupon interest every year. So there is some other zero coupon treasury your FA put you in?

Getting taxed in the year it is paid is what I expected but apparently that is wrong, there are zero coupon bonds that are longer, and there is an accrued type of interest that supposedly will get included on a 1099 and is taxable even though not received.

I'm not sure when I bought it, it wasn't done by a FA, I am trying to be my own financial person, but it certainly is a learning experience.

 

[audreyh1]

That’s unfortunate. Perhaps the discount was susbstantial?

Normally bonds are required to pay out annually.

 

[TickTock]

Getting taxed in the year it is paid is what I expected but apparently that is wrong, there are zero coupon bonds that are longer, and there is an accrued type of interest that supposedly will get included on a 1099 and is taxable even though not received.

Right. From Investopedia: Zero-Coupon Bond: Definition, How It Works, and How to Calculate

How Does the IRS Tax Zero-Coupon Bonds?​

Imputed interest, sometimes referred to as "phantom interest," is an estimated interest rate. The imputed interest on the bond is subject to income tax.
The IRS uses an accretive method when calculating the imputed interest on Treasury bonds and sets a minimum interest rate relative to imputed interest and the original price discount.2
U.S. Code. "26 USC §1274."

As far as a simple investment tax guide - I wish!

 

[Palmtree]

I'm pretty sure TIPS pay interest twice a year. It's a phantom income and althought you don't receive the interest, you are taxed on it in the year it was earned. Therefore it's recommended you buy them in an tax deferred account.

 

[audreyh1]

I'm pretty sure TIPS pay interest twice a year. It's a phantom income and althought you don't receive the interest, you are taxed on it in the year it was earned. Therefore it's recommended you buy them in a tax deferred account.

You actually do receive the twice yearly coupon payments. What you don’t receive is the inflation adjustment to the principal. When it matures you get the inflation adjusted principal. But this adjustment is taxed annually as if it were interest payments “imputed interest”. Good reason to hold in tax-deferred accounts.

 

[BlueberryPie]

I usually do our taxes, and I agree it's not always easy to know what you can and cannot do. Reading forums like this one and Boglehead can help being more aware of the different tax tips.
Also if you use software like TurboTax, read through the forms it generates and see if you understand why the form is filled that way and why certain things aren't checked. The software is generally right but it's not always obvious to understand why.
My wife opened a business so we hired an accountant to do the taxes for us, and when I want over the forms I found many things she missed. Like interest from US treasuries not being taxable in state. Her argument was that it would have cost her more at her hourly rate than the money we'd have saved.

I also found one thing she did that is "illegal" even though the tax paid was correct in the end, so in her book that made it OK.

 

[Koolau]

I usually do our taxes, and I agree it's not always easy to know what you can and cannot do. Reading forums like this one and Boglehead can help being more aware of the different tax tips.
Also if you use software like TurboTax, read through the forms it generates and see if you understand why the form is filled that way and why certain things aren't checked. The software is generally right but it's not always obvious to understand why.
My wife opened a business so we hired an accountant to do the taxes for us, and when I want over the forms I found many things she missed. Like interest from US treasuries not being taxable in state. Her argument was that it would have cost her more at her hourly rate than the money we'd have saved.

I also found one thing she did that is "illegal" even though the tax paid was correct in the end, so in her book that made it OK.

Time to find a new accountant - or sounds like you can handle it yourself.

 

[BlueberryPie]

Yeah the accountant got the boot, got a new one to help with some set up things with the business, but she told me she knew I didn't need her for the taxes.