Get your taxes done using TurboTax

For several years now, TurboTax users have noted that TurboTax claims that Charles Schwab 1099-OID’s for tax-exempt bonds with a positive bond premium in Box 10 must have Box 10 manually reduced to 0 because Schwab provides no Box 2 value and it is treated as being null (0). For young or lower income tax payers it is probably fine to change Box 10 to 0 and simply allow TurboTax to compute an erroneously high 1040 Line 2A value for the net tax-exempt income. After all that doesn’t affect their taxes due.

HOWEVER, for medicare eligible, higher income tax-payers, simply changing Box 10 to 0 might be a costly mistake. If you happen to be very near the top of one of the Medicare IRMAA income brackets you might possibly be subjected to as much as $2,900/year/couple in higher Medicare premiums. Even a single dollar of erroneously high net tax-exempt income could theoretically cause your MAGI (taxable AGI plus net tax-exempt income) to bump you into the next higher IRMAA bracket. Unfortunately the exact IRMAA brackets for 2023 Medicare premiums won’t be announced until December 2022 (much later than when you file your 2021 taxes that are used for determining what your 2023 Medicare premiums will be).

After several failed attempts to get Schwab to send me and others corrected 1099’s, I have decided to change the 1099-OID Box 10 value to 0, AND TO REPORT in TurboTax for the Schwab 1099-INT a positive “adjustment to interest” of type “T --- Bond premium on tax-exempt”. The positive amount of the adjustment is the total amount of the 1099-OID box 10 value that had to be set to 0. This seems to then allow TurboTax to compute the correct net tax-exempt income for Line 1040 Line 2A. Schwab clients shouldn’t have to know how to make these manual adjustments (that could be error prone) in order to get the proper net tax-exempt interest for 1040 Line 2A.

After careful reading of IRS Pub 550 and Instructions for Forms 1099-INT and 1099-OID it is clear that for tax-exempt bonds subject to OID reporting, the IRS requires the payer to report the usually relatively insignificant net tax-exempt OID as Box 11 minus Box 6 of the 1099-OID (and I agree that Schwab must generate a 1099-OID with Box 11 and Box 6 populated for the bonds subject to OID reporting). The IRS also describes two options for payers to report net tax-exempt income (for the usually much larger semi-annual interest payments). It can be reported VIA 1099-INT (Box 8 minus Box 13) OR VIA 1099-OID (Box 2 minus Box 10).

Without any apparent justification in those IRS documents, the dimwits at Schwab (or their subcontractors) apparently decided to report the total gross tax-exempt income (for all OID and non-OID bonds) on 1099-INT Box 8 but to only report the non-OID bond premium in Box 13. Without any apparent justification, they decided to separate out and report the individual bond premium for OID bonds on individual 1099-OID’s Box 10 without reporting the gross tax-exempt interest for those bonds in the same 1099-OID’s Box 2 (as implied by the IRS instructions giving payers the option to report the semi-annual periodic interest for those bonds in the 1099-OID rather than the 1099-INT).

There appear to be absolutely no IRS instructions telling tax payers or tax prep software developers that they should match up gross tax exempt interest on the single 1099-INT with the bond premiums on multiple 1099-OID’s Box 10. It appears perfectly valid for TurboTax to complain about the Schwab 1099-OID’s. While I have no easy way of knowing, I seriously doubt that other tax-prep software would handle the bizarre reporting by Schwab any better, and I seriously doubt that the IRS would adjust the 1040 Line 2A value before passing it along to CMS/Medicare for IRMAA based premium calculations. It would seem reasonable and probably required by the IRS to treat a negative value for 1099-OID Box 2 minus 1099-OID Box 10 as 0 rather a negative value to be used as an adjustment to Form 1040 Line 2A. At least TurboTax warns about the reporting error. Some tax-prep software might silently discard the adjustment that should reduce the Form 1040 Line 2A value.

Frankly, I could find no REALLY REALLY explicit IRS instructions specifically forbidding the bizarre Schwab manner of reporting bond premiums, but then why should they have to forbid all cases of stupidity. Rather than this possible omission tacitly implying that Schwab has reported the data properly, I believe that it is merely indicative of the IRS document authors simply never considering that any payer would be so incredibly naive as to split up the reporting of gross interest and the associated premium onto separate forms (as Schwab has done). The 1099-INT Box 13 instructions seem clear enough to me that Box 13 is supposed to contain the bond premium for any bond interest reported in 1099-INT Box 8 (that seems to implicitly include bonds subject to OID if the payer has chosen to report the semi-annual gross tax-exempt income in 1099-INT Box 8). The instructions very definitely DO NOT say ANYWHERE that it is OK for the payer to report the semi-annual gross tax-exempt income in 1099-INT Box 8, report $0 premium in 1099-INT Box 13, and then turn around and report the premium associated with that gross income in a completely different form (in this case 1099-OID Box 10) where the premium will be ignored by tax-prep software rather than used to compute the correct net tax-exempt income.

It appears to me that Schwab (or their subcontractors) had incredibly poor understanding of proper accounting methods to report an adjustment to income on a completely separate form from the form that reports the associated gross income that needs to be adjusted. I have repeatedly asked that this issue be escalated to the proper level, but I have repeatedly been told that Schwab thinks what they have been doing is correct and that their software cannot generate the corrected consolidated 1099 that I have requested (at least I agree that bad software cannot magically become good software without putting some effort into fixing it). I understand that this issue is again being reviewed, but so far after several alleged reviews I have heard no credible justification for the manner of reporting that Schwab has done for years. I have so far gotten no commitment from Schwab to correct their software and otherwise take responsibility for what sure appears to be improper reporting for several years.