Taxpayer received an e-mail from Schwab regarding "2014 IRS Rule Changes to Fixed Income Securities Purchased at a Premium or Discount".
I cannot cut and paste the text, but what are brokers doing now regarding this issue? Will they be calculating the annual numbers you need, so taxpayers don't have to do it themselves? Will they be reliable numbers? Are there alternative methods that might be more advantageous to the taxpayer?
for "Less complex fixed income and option securities" was implemented as of 1/01/2014. Brokers' cost basis reporting will assume that clients have elected to amortize bond premiums.
A very good explanation of all the broker assumptions unless a written election is received from the taxpayer is at:
Reviewing Schwab's material, for callable taxable bonds the amortization schedule is no longer based on just the maturity date, but chooses from among - call date(s) and - maturity date based on which gives the highest calculated yield.
For callable tax-exempt bonds, it's the lowest yield instead. (Rationale for the difference eludes me.)
Is this new from the IRS, or is it something Schwab devised?
If the bond is not called by the chosen date, one would have to stop amortizing at that point, the adjusted basis remaining at par.
Two follow-up questions:
Are taxpayers supposed to modify old amortization schedules for bonds acquired in earlier years?
Will brokers start reporting the yearly amortized bond premium adjustments to the IRS?
In the past, IRS publication 550 covered this topic. See page 34 in the 2013 version. The 2014 version might be different.
Is there an IRS document available now that describes changes to taxpayers' amortization reporting requirements for 2014?
Thanks.
THIS is my key question:
"Will brokers start reporting the yearly amortized bond premium adjustments to the IRS?" (and the same issue re bonds bought at a discount).
For new, covered debt securities, will the broker do all the math for me and provide me with the correct numbers for my tax return? If so, how/in what form?
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Form 1099-INT for 2014 has new boxes 10 and 11 for this, also see form instructions. May not answer all of your question but it's a start.
As Schwab said beforehand, they changed bond amortization schedules for callable tax-exempt bonds from a "yield-to-maturity" calculation to "yield-to-worst," starting with the August monthly statement. This is deduced from a large change in the Adjusted Cost Basis (ACB) from July to August. The July-to-August difference appears uncharacteristic compared with earlier month-to-month ACB changes.
Apparently, they changed the amortization schedules not only for covered securities (bonds purchased in 2014) but also noncovered (those purchased earlier.)
MY QUESTION: is the taxpayer supposed to redo the amortization schedules for noncovered bonds? If so, how?
The answer would affect - the basis reported if a bond is sold or called. - the Amortized Bond Premium (ABP) that contributes annually to Form 1040 line 8b. If the amortization is changed, how does it account for ABP already reported in prior years using yield-to-maturity?
The IRS instructions for the new 1099-INT say for noncovered bonds that only gross interest is reported on 1099-INT, with no effect on box 11. So it doesn't help with my question.
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