I have tried to puzzle this out and my head is about to burst.
1) I owned a Municipal bond all year and received two interest
payments. But my statement also shows $31.60 in Original Issue
Discount. What the heck do I do with that? Does it make my taxes go
up or down? Does it affect my basis? The interest is completely tax
free; but I don't know about the OID.
2) I have some Treasury bonds with Accrued Interest Paid on Purchases,
and also Accrued Interest on Sale of Bonds. Do they make my taxes go
up or down. Which? Do they add or subtract from my basis?
If they affect my basis, will my brokerage statements account for
I appreciate the help!
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It is additional tax-exempt interest and should be reported on on the
"Tax-Exempt Interest" line of Form 1040. You will also increase your
basis by the amount of that OID. You do NOT increase your basis by
the amount of the semi-annual coupon payments.
(BTW, if you didn't buy the bond at original issue you need to check
if you bought the bond for a price that was not equal to its original
issue price plus OID accrued to the date of purchase. If you paid
less than that number you will have additional, taxable (even though
this is a muni bond) interest to report. If you paid more than that
number, you will have a reduction to apply to the tax-exempt interest
The accrued interest you received should already be included
in the 1099-INT your broker sent you. It is, of course, taxable.
You have to manually add up the accrued interest you paid
and then show it as a negative adjustment in the interest
portion of your Sched B -- so it will decrease your taxable
Neither the accrued interest paid nor the accrued interest
received will affect your basis.
(Think of what accrued interest is. Most bonds only pay interest
every 6 months, and whoever owns the bond on the coupon date gets all
the interest, even if they only owned the bond for a day. So
adjustments have to be made (this is just like property tax
reimbursements between the buyer and seller of a house).)
Accrued interest received is taxable. The buyer is reimbursing you
for the interest you gave up. Say you held the bond for 4 months
after the most recent semi-annual interest payment. Even though the
buyer will have owned the bond for only two months of the current
interest period, he'll get paid for 6 months of interest and you get
To adjust for that, the buyer will pay you four months worth of
accrued interest. That is taxable to you and deductible to the buyer
and results in you having received 4 months of taxable interest and
the buyer receiving 2 months of taxable interest.
If the bond was traded through a broker you shouldn't have to do
anything special since the broker should include the accrued interest
you received in the total number on the 1099-INT the broker sends you.
If the bond wasn't traded through a broker or if the broker didn't
include it in the 1099-INT, you need to report it as additional
Reread the sentence, When you purchase, you are paying the previous
owner the accrued interest to date, and you receive the full "coupon"
payment at the next payout date. You thus net the prorata amount of
The accrued interest that you paid out then you purchased the bond
is treated as a reduction of received interest. If this is a
taxable bond you subtotal the Schedule B interest line, then
enter "Accrued Interest" and subtract that accrued interest. You do
this in the year the interest coupon was received, even if the
accrued interest upon purchase was paid the previous year.
Same principle for muni interest, except you might not be showing
interest or accrued interest paid on Schedule, still you reduce the
Line 8b amount by the accrued interest paid in the year you received
the coupon payment.
For those who might not be following my use of the term Coupon, here's
a homework assignment: Visit the safe deposit vault area of a local
bank and notice the scissors chained to a desk in that area. Why
scissors? Hint: Asking the bank officer probably won't help. :^)
In the year the next coupon pays, not necesarily the year you
paid the accrued interest.
I'm not sure we are at odds, though it seemed you were speaking
of the seller not the buyer when you spoke of accrued interest received.
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