Accrued Interest Tax Free Municipal Bonds

[dick16]

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.

[DianeW777 · Accepted solution]

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.