Original Interest Discount and Accrued Interest Confusion

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 that?
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 you report.)

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 interest.
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).)
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Rich Carreiro snipped-for-privacy@rlcarr.com

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Is accrued interest received a positive adjustment, or do I ignore it?
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On Wednesday, February 29, 2012 6:32:28 PM UTC-5, Confused wrote:

Seems to me that it is ignored. I never got the interest, so I shouldn't have to pay tax on it. The buyer is paying me to get the interest, so it is just part of the sale price.
Yes? No?
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No.
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 zero.
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 interest received.
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Rich Carreiro snipped-for-privacy@rlcarr.com

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Agree.
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 received interest.
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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ArtKamlet at a o l dot c o m Columbus OH K2PZH

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