Accrued market discount from Treasury bills and notes

[TurboLover2]

I am still not convinced that there is not a solid answer to this question.

Probably hundreds of thousands if not millions of Treasury Notes and Bonds are traded on the secondary market each year and have been for many years.

I cannot accept that there are not tax professionals who have regularly dealt with this for years and know exactly how it is routinely handled.  It's just not logical to believe that.

But it seems like none of them are readily available to chime in anywhere on the Net.  That's unfortunate.

[TurboLover2]

Part two is how to enter it in your state form if you decide to take the exemption.  From what I have been reading it is trickier in TurboTax than I would have thought (have not confirmed anything below myself yet).

Regarding TurboTax NY state IT-201, I have read that you CANNOT manually override the entry for Line 28 "U.S. Interest on US government bonds," because doing so prevents you from being able to file your return electronically.

There MAY be a way to trick this in there, but it would not accommodate everyone and would be much better to have a right way to do it.

It could also be entered on line 31, but that doesn't seem like the most appropriate place for it and may present other issues.

[odyinpdx]

@notAnAspiringAccountant 

From what I read, Treasury zero coupon bonds (STRIPS?) are taxed yealy based on an imputed interest amount.  Do the major brokerage houses compute this and include the amount on the 1099-INT Box 3?  Or do we have to calculate it?

[notAnAspiringAccountant]

I'm not any kind of expert, but in my limited experience (this is my first tax year dealing with treasury income), my zero-coupon treasury bill income was completely included in Box 3 of the 1099-INT. I didn't need to make any adjustments. 

I'm not sure what STRIPS are. I'm also not too familiar with the tax treatment you're talking about. I understand there's something with treasuries, where you can either pay tax in the year you realized the interest, or you can spread it out across the years you held the treasury. Something like that. I don't know the details. I only bought very-short term treasuries/bonds, so I didn't do anything fancy.

[odyinpdx]

@notAnAspiringAccountant 

Got it.  I should have read your original post more carefully.  You are talking about Treasury Bills, which are by default zero coupon (and mature in less than a year).  I thought you were referring to longer term treasury bonds, some of which are sold as zero coupon.  STRIPS (Separate Trading of Registered Interest and Principal of Securities) refers to the fact that  interest payments are separated from the principal on longer term Treasury Bonds.  (So the principal portion has zero coupon)  

I also had some Treasury Bills and see that the difference between purchase price and redemption amount is, in fact, in Box 3 on the 1099-INT.  So much easier to deal with.  This is my second year dealing with US Treasuries and taxes.  Last year was all T Bills.

[notAnAspiringAccountant]

Well, in my case, I did have treasury bonds too, which I unknowingly bought on the secondary market when they were ~3 months to maturity. So they "looked like" bills but actually weren't. 

[TurboLover2]

" Do the major brokerage houses compute this and include the amount on the 1099-INT Box 3?  Or do we have to calculate it?"

STRIPS are OID bonds with a special kind of tax treatment.

Even though you receive no interest payment each year you hold them the "phantom" interest has to be reported as income.  It will be reported to you on Form 1099-OID (not 1099-INT).  The amount on that form should be the amount you report as income UNLESS you bought or sold the STRIP on the secondary market.  If you did that, you may have to make adjustments and do additional calculations.

==

"my zero-coupon treasury bill income was completely included in Box 3 of the 1099-INT. I didn't need to make any adjustments. "

As long as you didn't buy or sell this Treasury Bill on the secondary market, then yes, that's all there is to it.  Original issue Treasury Bills held to maturity are probably the simplest tax case of all treasuries.  It's all simply treated as interest that is state tax exempt.

=

"Well, in my case, I did have treasury bonds too, which I unknowingly bought on the secondary market when they were ~3 months to maturity. So they "looked like" bills but actually weren't."

Ouch!  Rookie mistake there.  But that's how we learn!

[DoingItRight]

I'm not going to debate if it is state taxable or not, but if you decide that it is exempt from state taxes, here is how to do this for California:

Go to CA Investments section, then Interest and Dividend Adjustment section. The first screen shows specific items. Don't edit anything and continue. Now you are in the "Other Interest" section. Add something like the following to the Description and Subtraction columns:

Description: "Accrued Market Discount on T Note XXXXX"

Subtraction: 1234.00

[odyinpdx]

I spoke with someone at the Oregon Department of Revenue (beyond the person who answers the phone and answers the "simple questions").  They couldn't find anything specific in their documentation that says how to treat the AMD, either way.  They could certainly see my point to treat it as non-taxable interest income (he caveated it by saying that whatever he tells me on the phone can't be relied upon for tax advice). He even ran it by a couple colleagues and called me back a week later.  The bad part is they know my name and SSN.  Hopefully, I haven't been flagged.