I received a 1099-OID for some preferred shares (LUTHP) that I bought on the secondary market last year. The box 1 OID is about 10% less than the actual payments I received for the year. Box 2 is empty. A note on Box 1 says "You may need to make certain adjustments to this information."
- Am I _required_ to adjust the OID, or can I just list the reported amount on Sch B?
- If I am required to adjust, I would appreciate a link to guidance on how this is done.
Thanks, George
After more than 20 years after getting my one and only OID notice, it still rankles me to think about it. If it still is the same kind of animal, OID is a method used by the IRS get a little bit of money a bit earlier by making you (taxpayer) keep records for years. I believe it came out of the IRS getting fancy computers to keep track.
Before such computers, if you bought a $1000 bond (shows how old I am) at 98, it meant you paid $980. When the bond matured you would get $1000. You would pay capital gain tax on the $20 difference. Relatively easy.
Now, with even fancier computers, that $20 is considered to be interest. You have to pay tax on that interest every year and keep pertinent records as well. Bah Humbug.
If that isn't bad enough, I will tell you about some insurance I did not know I had paid for my employer when I retired. I had to pay tax on imputed income. Not much but bah double humbug.
By the way, the IRS is doing all this at the behest of Congress. Bah triple humbug.
Typically, preferred stock is issued at par and there is no OID. In your case, LUTHP was a originally a private placement issued at a discount to par (Par being $1000). As it was issued at a discount, there is OID. There is also interest at 7.75% paid during the year. It is this interest that you received in cash. It is highly unlikely that you need to adjust the OID. Just report the amount in Box 1 as interest income.
For more info on how one treats OID, see IRS Pub 550.
OID is Original Issue Discount. This means that at the time the debt was first offered, it was priced below its redemption value. This has nothing to do with buying $1000 bonds at $980 due to market conditions. So.. in your example, unless the buyer purchased a $1000 bond for $980 when originally issued, there is no OID and at maturity, there would be a $20 capital gain.
In article , Alan wrote
I understand this. At the time OID was introduced, very few people, if any, had computers. It was probably even difficult for 1099 issuers to set up.
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