Accrued market discount from Treasury bills and notes

[tfgatlin]

That's actually what I'm (and many others) are asking. IS it exempt for state taxes? If its treated like interest, then it should be. If it's not interest, then why is it transferred to Part I of Schedule B,  with all the other interest? I've also got a call in to Charles Schwab asking how to identify US Treasuries that are going to produce an Accrued Market Discount so I can make sure this never happens again. 

Thanks for your posts, hopefully we can zero in on solution.

[TurboLover2]

I have been scouring the Net looking for an authoritative answer to this question and posted the question in several forums.  So far nothing I consider authoritative.

You have to be really careful with things like this.  Just because someone on the Net says something doesn't mean is correct.

A few months ago I read an article from TurboTax posted on their site, written by someone they titled an "Expert" AND it was also noted that it had been reviewed for accuracy by a CPA.  But it was still materially inaccurate.  So the best way to go is to get multiple authoritative sources.  But I have a feeling that may require input from a tax attorney on this one.

I also have a question in to my CPA regarding whether NY exempts the AMD.  If he answers soon, I will post his response here.

[fjsingel]

I have not be able to research this completely yet, and I am not an expert, but this MAY be what is happening.
1) if you buy the Treasury in the primary market, you have an OID (Original Issue Discount).  This is reported as Interest on your 1099-INT
2) If you buy the Treasury on a secondary market,  discount you get is not longer matched to the original OID of the treasury (for example, when interest rates move).  Therefore, it is further away from representing interest.  This all comes on your 1099-R as accrued market discount that gets pushed to your Schedule B as interest (instead of a gain) so it can be taxed like interest.  I think the states may take away the state tax-exempt status of the Treasury in the secondary market because because the discount may have changed when interest rates changed and you really are not getting anything that resembles the original intent.

Again, this is just a theory, I need to look at this more.  If it is true, I just learned a lesson the hard way.

[TurboLover2]

An OID bond is not the same as a coupon bond.  Treasury Bills, for example are OID.  They pay no coupon interest payments.  Treasury Notes and Bonds are not OID, they do pay coupon interest payments.  The difference between the price of a primary original issue discount (OID) Treasury security and the maturity value is always treated as interest that is exempt from state income tax and will be reported on a 1099-INT just like the coupon interest from a Treasury Note or Bond.  But a Note is not OID so the OID rules do not apply to it.

[notAnAspiringAccountant]

Fwiw, I called up the Massachusetts Dept of Revenue today, and they told me that accrued market discount on US Treasury Notes (Box 1f of 1099B) is tax-exempt in MA.

[TurboLover2]

That's a good sign.  👍 Let's hope it's right.

[TurboLover2]

Just got off the phone with the New York Department of Taxation and Finance.

The first answer they came up with when I asked the question was (and this is verbatim):

"I assume if there is federal tax on it then there must be New York tax."

I immediately knew it was all over at that point but still hoped against hope.

So I asked if there was some sort of specialist I could speak to since the question was technical.  Answer: No

I patiently restated the question in several different ways to try to simplify it.  Each time ended in an excuse as to why they cannot answer: "We can't tell you how to fill out your tax form," "1099-B is a federal form, we cannot address what is on that form," etc.  Each time I restated the question to eliminate the excuse.  It went nowhere.

I can't say she wasn't willing to try... in the end she was actually Googling for it on the Internet.  She was a very nice person but she had no idea what I was talking about and it sounded like she didn't even know what a 1099-B was.

Finally she told me she cannot answer, I would have to ask my tax preparer and they could not assist.

Your tax dollars at work.

[fjsingel]

So, any idea how to get TT state to let you do this?

[MarilynG1]

From Investopedia.com:

'The accrued market discount may be taxable at the federal, state and/or local level. An investor who chooses to accrue the market discount over the period during which s/he owns the bond would include the amount accrued each year as interest income.'

The Accrued Market Discount is most likely taxable at the State level.  You would need to confirm that it is NOT with your State Dept. of Revenue, or perhaps a local CPA.

@fjsingel 

[TurboLover2]

@fjsingel 

As I previously mentioned I think step #1 is to find out if the accrued market discount for the particular bond that is on your 1099-B IS in fact exempt from income tax in your state because if it is not, you don't have to worry about entering anything else in TT other than the federal 1099-B.

So far I have not found a convincing answer to this question so for me I am not up to step #2 which would be to turn that answer into proper entry of information in TT.

However, from my experience with TT in past years, I am guessing that step #2 would be accomplished by manually entering the amount that is exempt from state tax (if any) into your STATE tax form.  For my state there is a place to enter subtractions from the amount of federal taxable income reported on the federal return into the state return in TT.   Don't know about other states. 

[odyinpdx]

Oregon checking in.  I have the same issue.  I am going to file my return from TT Desktop, which allows me to overide the amount of Schedule B interest that was transfered to the adjustment line on the state return.   Then I will wait for the letter from the Departent of Revenue saying  "what the hell did you do".  

I did have the option, in TT Online, to manually create an adjustment (using a bunch of "other"/"not listed" options).  However, it would allow me only to create one with no adjustment code (a three digit number Oregon uses to denote the nature of the adjustment).  I prefer to use TT Desktop to override the amount on code 315 (Interest and dividends on U.S. bonds and notes)

[TurboLover2]

This seems to be one of the most difficult tax questions to get a straight answer to on the Net.

It should be a simple slam dunk for anyone who has experience with it.  But I have seen answers from so-called "experts" that are all over the place.  They cannot all be right.

Sometimes the problem is that the question isn't clear.  For example, on this post the title refers to both Treasury Bills AND Notes.  But the answer may be different for each since a Treasury Bill is an OID instrument and a Note is not.  So if you ask the wrong question, or a confusing question, you can get the wrong answer or a confused answer.  And there don't seem to be too many people around the Net ... at least those who are willing to volunteer an answer.

I love my CPA but frankly can't be sure of his handling of this without getting some other reliable source second opinion.  But so far that seems impossible.

I think the question I have been posting around on different sites is quite clear.  But no one seems to know a definitive answer as to whether the accrued market discount is state tax exempt or not... in ANY state or in ALL states.

This is a really frustrating question.  Needs someone who has specific knowledge of this topic AND experience filing returns that include such cases, not just any tax "expert."

[tfgatlin]

Amen. So far I've found two definitive answers: "absolutely yes" and "absolutely no".

[odyinpdx]

I reached out to a local CPA who said "you should not be taxes on the AMD on the Oregon return".  (I assume he means taxed).   So that plus, Oregon's "detailed list of bonds and notes that
may or may not qualify for this subtraction" 

    Yes Treasury bills and notes—interest.
    No Treasury bills and notes—gain on sale.

The fact they explicitly call out gains on sale, to me indicates they have given it some thought and since the Feds consider AMD as interest  income, I'm going with it.  (and as I mentioned, half expecting the state to send me a letter).

FWIW - Not surprisingly, I started a return in Pro-Connect (one of Intuit's professional tax prep products) and had the same issue.  I'm curious as to whether other tax prep software do anything differently.

[TurboLover2]

Accrued Market Discount is a "gain."  But it is not the same as a "Capital" gain.  They are two different things and treated differently on a federal return.  When you sell a Treasury Note or Bond, that was purchased on the secondary market, prior to maturity, there may be both an accrued market discount and a capital gain.  The AMD will be treated as interest on the federal return and the capital gain will be treated as a capital gain.  Two different things.

But again sticking to the question which for me is about state taxes because I already know how federal taxes are properly handled:

Is the AMD reported in box 1f of 1099-B exempt from state taxes in:

A) No states?

B) All states?

Or C) Some states and if so which ones?

That is the question here and in spite of pages and pages of posts I find on the Net on this topic, some of the posts on threads I started myself I have seen no definitive authoritative answer to this question.  It is as elusive as unicorns.

There is an answer, but we need to find someone who knows it and doesn't just "think" they know it.

Then the question of how to enter it in TT is a secondary question.  I believe that should be simple once we know the answer.