Bond Accrued Interest

There were several posts on this before, but there's some ambiguity
and possible conflicts in some of the previous answers so I'm asking
for some clarification.
-----------------------------
This is what Pub 550-2011 says on the topic:
"Accrued interest on bonds. If you received a Form 1099-INT that
reflects accrued interest paid on a bond you bought between interest
payment dates, include the full amount shown as interest on the Form
1099-INT on Schedule B (Form 1040A or 1040), Part I, line 1. Then,
below a subtotal of all interest income listed, enter ?Accrued
Interest? and the amount of accrued interest you paid to the seller.
That amount is taxable to the seller, not you. Subtract that amount
from the interest income subtotal. Enter the result on line 2 and also
on Form 1040, line 8a. "
-----------------------------
Questions:
1) It doesn't say anything about only deducting the accrued interest
paid on Schedule B in the tax year you receive your 1st bond interest
payment for the specific bond for which the accrual was paid. In other
words, if you buy a bond on 12/31/2012 and pay accrued interest (AI)
to the seller and receive no interest on that bond in 2012, it seems
you CAN still deduct (on Sched B) the AI you paid in 2012 in tax year
2012 and don't have to wait until TY 2013 when you receive your first
interest payment (as some posts said or implied).
Is this true, with the qualifier that your Schedule B subtotal (line
4) should be positive (you have other bond interest to reduce)?
2) The specific P550 directions above are confusing as to how to fill
out the form.
a. Do they mean that you just lump all accrued interest in one line?
b. What does "then below a subtotal ..." mean.
Do they really instead mean include accrued interest at the end of Sch-
B Line 1?
Does the accrued interest need to included as negative or positive?
E.g. is this correct:
Sched-B
1. BOND A 100.0
BOND B 25.0
BOND C 50.0
Accrued Interest -50.0
-----------------------------
2. 125.0
3.
4. 125.0
Thanks.
Reply to
Thunderbird
Please note the wording in the first sentence from the paragraph in Pub 550 that starts with: "If you received a Form 1099-INT that reflects accrued interest paid..."
You will not receive a 1099-INT in 2012 for accrued interest paid for the bond you bought on 12/31/12 between interest payments. You will receive the 1099-INT in 2013, the year you actually receive the interest payments. Therefore, there is no accrued interest deduction for 2012 in your example. Accrued interest deductions are tied to the first interest payment you receive. It is your 2013 return that will reflect the interest you received in 2013 less the accrued interest paid on 12/31/12.
Re how to report the accrued interest:
After all the entries for Line 1 interest you received, enter a subtotal for Line 1. On the next line write the words "Accrued Interest" and enter the amount as a negative number. Note that the instructions for Line 2 state that you should add the amounts on Line 1. You would add a negative number... the equivalent of subtracting a positive number.
Reply to
Alan
I asked this question on this newsgroup once but didn't get a clear answer. I think I ended up deducting the accrued interest (as a negative line item on Schedule B) for the earlier year (2012 in your example), but my net Schedule B was still positive so it probably didn't raise a red flag. I think the seller of the bond will reported the accrued interest in the earlier year (2012) because that's when they receive the money, so it makes sense for you to deduct it in 2012 also. My answer contradicts Alan's. You may fill out form 8275 to disclose your method, and all penalties and I think interest will be waived.
It's good to report the accrued interest for each bond on a separate line. I think that's how tax programs do it and it's clearer to read.
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