Accrued Interest Paid on US Treasury Note

[Os4]

I paid accrued interest in December of 2023 when I bought a US Treasury Note on the secondary market. I did not receive interest income on the Note until 2024. My 2023 Consolidated Forms 2023 includes a Supplemental Tax Statement which includes the amount of the accrued interest paid and the date of payment. Do I reduce interest income in 2023 (the year the accrued interest was paid) by the amount of accrued interest paid or do I reduce interest income in 2024 (the year the related interest income was received)?

[DianeW777]

Yes, you have the portion of the interest reported that was paid to the seller.

• Also include any accrued market discount that is includible in income and any gain on a contingent payment debt instrument that is includible in income as interest income.

Since you did receive a 1099-INT for any accrued interest you did not yet receive, but rather the original owner received, you can make an adjustment.

Accrued interest.

When you buy bonds between interest payment dates and pay accrued interest to the seller, this interest is taxable to the seller. If you received a Form 1099 for interest as a purchaser of a bond with accrued interest, follow the rules earlier under Nominees to see how to report the accrued interest. But identify the amount to be subtracted as “Accrued Interest.”

Nominee.

If you received a Form 1099-INT that includes interest you received as a nominee (that is, in your name, but the interest actually belongs to someone else), report the total on line 1. Do this even if you later distributed some or all of this income to others. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter “Nominee Distribution” and show the total interest you received as a nominee. Subtract this amount from the subtotal and enter the result on line 2.

• Schedule B Instructions

In TurboTax you do this by entering the 1099-INT, then checking on the next screen that you need to adjust the amount.  

You'll then be able to enter the adjustment amount and check the reason for the adjustment.

[Os4]

So should I take the deduction for the Accrued Interest Paid in 2023 (the year it was paid) or 2024 (the year the first related interest income payment was received?

[RobertB4444]

Use the form.  The form says 2023 do it in 2023.

@Os4 

[SteamTrain]

@Os4 

I think I disagree with it being reported in 2023.  Here's my evaluation of the issue.

The directions state (in a handwaving manner) that you report the accrued interest paid to the seller...if you received a 1099-INT that includes the interest that you paid to the seller.

Since you did not get paid any interest until 2024, the 1099-INT that includes that interest will not be reported to you until you get the 2024 1099-INT next year.  The 1099-INT will include the full amount of interest received at for 2024...some of which you pre-paid to the seller of the bond.

(But yes, if your 2023 1099-INT includes interest in box 3 "From that bond"...then you could report it for 2023.  The Supplemental Info sheets usually tell you if they included any from that bond)

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Take for example, a person who has bought a bond as you did, and had no other Treasury Bonds/Notes for 2023.   Box 3 on the 1099-INT would be empty for 2023, and attempting to report the accrued interest paid to the seller on that 2023 1099-INT would be an effective loss...for box 3.  The IRS isn't allowing that.

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 A point of warning for entering in the software though....if the 1099-INT you receive contains box 1 or box 8 $$ in addition to the box 3 $$ from your Treasury Bond....take the box 3 $$ (and box 12 $$ if any), and create a separate 1099-INT with just the box 3 (&12) $$, and report the accrued interest for that separate 1099-INT.  IF you don't do that, the accrued interest you report will be (improperly) divided proportionately between the box 1,3&8 amounts.