Accrued interest paid, tax-exept interest, & taxable interest

[Phen]

I have taxable, tax-exempt, and accrued interest in 2022.  Tax-exempt interest was entered in line 2a, 1040.  The Accrued Interest paid was entered as an adjustment to the full amount of the taxable interest.  It reduced the full amount of the taxable interest.  However, the reduction is smaller than the accrued interest amount, although the taxable interest amount is far more than the accrued interest.  The entering of accrued interest also reduced the amount of tax-exempt interest in line 2a, 1040.  Can some one advise me why?

[RobertB4444]

Accrued interest is divided among total interest both taxable and non-taxable by the percentage of interest.  The system is handling it properly.

@Phen 

[Phen]

Thank you for your response.  By doing so, the system assumes that the total accrued interest included payment to both taxable and tax-exempted bonds.  However, if it is the result of accrued interest paid to only taxable bonds (which is my case), shouldn't the full amount deductible?  How does the Turbotax handle it in this case?

[AliciaP1]

All bonds have accrued interest so if you are reporting both taxable and tax-exempt interest then the accrued interest represents both types as well.  There is no instance where the accrued interest would only represent taxable interest on a form that has both types of interest.  As RobertB4444 posted, the system is handling it properly.

@Phen 

[Phen]

Thanks.  I am not very familiar with bonds.  So, I need more clarifications.  I am under the impression that when bonds were purchased from their original issuers, there will not be accrued interest associated with them.  Am I wrong about this? 

Would you also please explain (or direct me to the relevant source) how to prorate the accrued interest between taxable and tax-exmpte interest, if I do it manually?  Thank.

[Phen]

Correction.  My meant the bond is an original issue.

[AliciaP1]

The only way to prorate accrued interest between taxable and tax-exempt interest is the percentage calculation posted by RobertB4444.  If you have more in-depth questions about your specific bond purchase and future earnings reporting, you need to contact your investment advisor.

@Phen 

[Phen]

Accrued interest needs to be prorated between taxable and tax-exempt interest makes sense, if it derived from both types of bonds.  However, the Turbotax also reduces the amount of reported tax-exempt interest on line 2a, 1040 after prorating the accrued interest.  What is the rational for it?

[prs7]

I'm puzzled by the statement of AliciaP1 who said, "All bonds have accrued interest." My understanding is that the term "accrued interest" as used here means that interest paid by a bond's purchaser in the secondary market. As such, for tax reasons, there is accrued interest for a bond only for the year of purchase. That is, during subsequent years, that bond has NO accrued interest. Am I missing something?

[Mike9241 · Accepted solution]

"all" bonds having accrued interest is not true. bonds bought on the original issue date will have none. However there are bonds traded in the flat. A flat bond is a bond priced without including any accrued interest owed to the bondholder, often referred to as its clean price. so most bonds bought/sold between interest payment dates will have accrued interest that belongs to the seller and thus reduces the purchaser's interest income