Accrued interest on a purchase of a bond do I deduct the accrued interest in the year I purchased the bond or the year I receive the first interest payment?

Bonds are typically taxed in two ways: when you earn interest on the bond and any capital gain on the sale.

When you earn interest, the IRS expects you to report that income on your tax return. Whether or not that income is taxable depends on the type of bond you invest in.

• The interest you earn on corporate bonds is generally always taxable.
• Most all interest income earned on municipal bonds is exempt from federal income taxes. When you buy muni bonds issued by the state where you file state taxes, the interest you earn is usually also exempt from state income taxes. If you buy muni bonds issued by another state, you'll still typically avoid federal taxes, but you'll likely be subject to state (and possibly local) income taxes.
• U.S. Treasuries are exempt from state and local income taxes but are taxable at the federal level.

For more information check: Guide to Investment Bonds and Taxes

 

To report in TurboTax. 

 

1. Select Federal Taxes
2. Under Wages & Income select Interest on 1099-INT
3. Enter your 1099-INT information, select Continue
4. On the screen Tell us if any of these uncommon situations apply, Select I need to adjust the taxable amount, select Continue
5. Enter the accrued interest paid in the Adjustment box. and select the Reason for Adjustment as My accrued interest is included in this Form 1099-INT

the year you get the first payment. 

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