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Accrued Interest Tax Free Municipal Bonds

I know how to adjust for accrued interest on taxable bonds but do not know how to do that on tax free Municipal bonds within Turbotax. I purchased numerous tax free municipal bonds from various states  in 2024. On each one I paid accrued interest. I will do a direct download into Turbo Tax from my brokerage company for interest, dividends and capital gains. How do I adjust the tax free interest in Turbo Tax to account for the accrued interest I paid on the municipal bonds I purchased? I live in a state that does not have state income tax. I need to do this because tax free interest is added back into the calculation to determine my Medicare premium.

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1 Best answer

Accepted Solutions
DianeW777
Employee Tax Expert
Intuit Approved! This answer has been verified for accuracy by an Intuit expert employee

Accrued Interest Tax Free Municipal Bonds

Once your 1099-INTs are downloaded, report the accrued interest as an adjustment shown below.  There you can make your adjustment for the portion of accrued interest you paid at purchase.  You are not required to report this portion as interest income.  Instead you add it to the cost basis of your bonds.

 

Since you are reporting Interest income on a bond that had accrued interest at the time you purchased, then you would reduce your interest income by the accrued interest at your purchase date. Enter the full amount of the interest, and then enter the accrued Interest paid as an adjustment to reduce it. 

 

Open your TurboTax return:

  1. Search (upper right) > Type 1099int > Click on the Jump to... link
  2. Enter your interest income > Continue > Select 'I need to adjust the interest reported on my form'
  3. Enter the adjustment amount (accrued interest at purchase) > Select 'My accrued interest is included in this 1099-INT'
  4. This will accomplish the correct taxable income for your return.

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10 Replies
DianeW777
Employee Tax Expert
Intuit Approved! This answer has been verified for accuracy by an Intuit expert employee

Accrued Interest Tax Free Municipal Bonds

Once your 1099-INTs are downloaded, report the accrued interest as an adjustment shown below.  There you can make your adjustment for the portion of accrued interest you paid at purchase.  You are not required to report this portion as interest income.  Instead you add it to the cost basis of your bonds.

 

Since you are reporting Interest income on a bond that had accrued interest at the time you purchased, then you would reduce your interest income by the accrued interest at your purchase date. Enter the full amount of the interest, and then enter the accrued Interest paid as an adjustment to reduce it. 

 

Open your TurboTax return:

  1. Search (upper right) > Type 1099int > Click on the Jump to... link
  2. Enter your interest income > Continue > Select 'I need to adjust the interest reported on my form'
  3. Enter the adjustment amount (accrued interest at purchase) > Select 'My accrued interest is included in this 1099-INT'
  4. This will accomplish the correct taxable income for your return.

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Accrued Interest Tax Free Municipal Bonds

I have a related question that I think I know the answer to.  If all the interest is from municipal bonds in my state (e.g. all tax free), I should not deduct the accrued interest, right?  This interest is shown in Box 8, Tax-exempt Interest and since I'm not being taxed on it, there's no reason to deduct it.

Thanks,

Rich

 

Accrued Interest Tax Free Municipal Bonds

While you do not pay federal income tax on interest from tax free municipal bonds, that "tax free" interested is added back into your income when determining annual Medicare premiums. If you do not account for accrued interest, it could place you in the next higher premium bracket, and this additional tax is not necessary if you can correctly enter accrued interest.

Accrued Interest Tax Free Municipal Bonds

Interesting.  I'm not on Medicare, so this isn't relevant to me, but if I were, how would I account for this?  I can't take it as a deduction from the interest the way it was described in the original answer because I'm not paying taxes on it in the first place (it's in Box 8). 

Rich

 

MarilynG1
Employee Tax Expert

Accrued Interest Tax Free Municipal Bonds

Although the tax-exempt interest reported in box 8 of the 1099-INT isn’t taxable, you still need to report it on the “tax-exempt interest” line of your tax return for informational purposes and for certain other tax calculations.

 

Here's more detailed info on Tax Form 1099-Int.

 

@richlux 

 

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Accrued Interest Tax Free Municipal Bonds

Of course I need to declare it. I'm not talking about declaring the interest from the 1099-INT boxes, I'm talking about the accrued interest from buying a bond between coupon dates. That interest is not on the 1099. It's part of the supplemental tax info and that interest is deductible. In my case, since the interest on the 1099 is not taxable, I can't deduct the accrued interest. 

 

Rich

Accrued Interest Tax Free Municipal Bonds

Hi Marilyn, thanks for your reply. Mine is a how to question. I understand I need to report tax free interest from municipal bonds on line 8. My question is how do I deduct accrued interest I paid in the purchase of numerous tax free municipal bonds in 2024? I understand this deduction would have no impact on my income taxes paid, but it does affect what I pay for my Medicare premium. For that calculation I have to add back into my total income the interest eared on tax free bonds. I should be able to deduct from that total the accrued interest I paid, as that really is not interest earned. I don't know how to make that adjustment in Turbo Tax, and if I don't make that adjustment in this years tax forms, I will be paying a higher Medicare premium in 2026. All the directions I have been given thus far is how to remove accrued interest from taxable bonds, I want to know how to remove accrued interest paid from tax exempt bonds. I hope my question is clear.

Accrued Interest Tax Free Municipal Bonds

@dick16 

 

The procedure is the same as shown at the top "solution"...EXCEPT, they missed one critically important change to the instructions:

 

IF the 1099-INT you receive, has a mix of box 1, box 3, and box 8 $$ on it.  Then you have to break out the $$ from that form and put it on it's own 1099-INT ....and only then use the Accrued Interest adjustment that is presented on the follow-up page.  IF you don't then the accrued interest is applied (improperly) among the box 1, 3, and 8 values.

 

So for your 1099-INT with Muni bond interest in box 8......if your 1099-INT also has any box 1 and/or box 3 $$ on it, you remove the box 8 and box 13 $$ from that 1099-INT, and create a second 1099-INT from that payer. with only the box 8 and box 13 $$ on it.  Then indicate the accrued interest you paid on the follow-up page and it will all be applied to the box 8 $$.

__________________________

With the following qualification, you are not supposed to subtract the accrued interest for any bond you bought, until the year in which you actually receive your first interest payment from it.

Example: So if you bought a bond (say) in November 2024, and it didn't pay out its first interest to YOU, until Feb of 2025, you aren't supposed to deduct the accrued interest for that bond, until you file your 2025 taxes in early 2026.

Details...Details:  I keep a spreadsheet with the Muni's I buy and a column showing what year I can claim the accrued interest I paid.

__________________________

For others,,,they should also note that the same thing applies to Corporate (box1 $$) and Treasury (box3 $$).  If  the 1099-INT in question, has some mix of box 1, 3 &* $$ in it.....AND If you pay the seller any accrued interest for those, then those $$ in boxes 1 (&box 11), or boxes 3 (&12), must be taken out of that 1099-INT and put in their own 1099-INT before indicating the accrued interest on the follow-up page.

_________________

Someday, TTX managers need to get their software people have three accrued interest entries on the follow-up page...one each related to only the box 1, 3, &8 $$ amounts.  I'd bet thousands of people accidentally mis-enter this data every year because they do not realize how they need to mess with the 1099-INT form.

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

Accrued Interest Tax Free Municipal Bonds

SteamTrain is exactly right.  If you don't split them up like he said, it mess up a lot of things!

Rich

 

Accrued Interest Tax Free Municipal Bonds

You nailed it. Even some Turbo experts were not able to provide this information. It would be easier if Turbo Tax would create a link that allowed you to apply accrued interest agains taxed and taxed free amounts. But in the absence of that enhancement, what you suggest is what I will do. Thank you for responding.

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