Accrued Market Discount on Treasury bonds

[DMarkM1]

Yes, if all the other entries have already been made for a Treasury bond sale including the Accrued Market Discount in box 1f which put US Treasury interest on Schedule B as "Ordinary Interest," then you can move a corresponding box 1 amount to box 3 on any 1099-INT.  That will keep the federal tax the same and populate the state forms with the US Treasury interest as applicable. 

[spichon]

Trying to avoid altering the entries from the 1099-int I opted to post the Accrued Market Discount on Schedule B as is and made a manual adjustment in the same amount on the California State,  Schedule CA (Int/Div Adj wks) line 12 column B and tagged it with an explanation.  Would that be acceptable?  Thanks

[RobertB4444]

Sure.

@spichon 

[litho]

You can solve this by going to the 1099INT for your brokerage and selecting "Bond Premium for treasury obligations" from the check boxes under the section "Adjustments to Interest".  Enter your Accrued Market Discount" as a negative number on the line "Enter adjustment amount".

This will add the Accrued Market Discount as a positive number to your Schedule B and will treat the amount appropriately for your State return.

NOTE:

1. Make sure to enter zero on the worksheet titled "Capital Gains (Loss) Adjustments Worksheet" in the last section, in the entry "Accrued interest to Schedule B".

2. Make sure you do not check the box "Sale includes an accrued market discount". This adds the accrued market discount to State and Federal income.

[SteeleBear]

In California, accrued market discount on Treasury bonds is ordinary income and taxable. I recently made the following inquiry to the Franchise Tax Board and there response follows:

Is "accrued market discount" for treasury bonds taxable as interest for California income tax. Please sight the code that establishes how it's treated. Thank you

Our response:

California generally conforms to Internal Revenue Code (IRC) sections 1276 and 1278 via Revenue and Taxation Code (RTC) section 18151. IRC section 1278 provides the definition of a market discount bond, which does not exclude US Treasury bonds. Under IRC section 1276, the portion of the gain on the disposition of a bond that represents accrued market discount is ordinary income that is recognized and is treated as interest except in certain specified circumstances. US Treasury bonds are not one of the enumerated exceptions. Therefore, the accrued market discount portion of the gain would be ordinary income that must be reported as taxable interest income even if the underlying bond is a US Treasury bond. The accrued market discount portion of the gain does not represent tax-exempt interest earned on a federal obligation.

Turbotax handle the data entry correctly.

[litho]

I feel lucky that incomed earned from treasuries is tax exempt in my state.

[Greg Brown]

Leave it to California to take every tax dollar they can get. Explains why TurboTax handles Accrued Market Discount the way it does, which unfortunately is incorrect for most other states.

[SteeleBear]

I received the following question yesterday:

"Is the conclusion that T-bonds purchased at a discount have the taxed at maturity, including at the state level and therefore it's suboptimal to purchase T-bonds at a market discount in the secondary market?"

Yes, in California, this is generally correct,  but you should calculate the actual after-tax return of investment to make this determination, or buy the bond close to par.

[srr]

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@tfgatlin wrote:

I can fix it. I can go to the state Interest Income Statement and manually move the Accrued Market Discount amount from the Regular Interest  column to the U.S. Government Interest column and everything works. My problem is I cannot find out if this is taxable in Alabama or not. No one knows...no one.

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How do you fix this in TurboTax 2023? I don't see the "state Interest Income Statement" as one of my form (in the forms section or even if I save all worksheets in PDF). The best I can figure out is to mark the discount as a subtraction in the "other"-item of the CA-adjustments. My Treasures interest is marked as subtraction in Schedule CA-adjustments in the "interest"-item and I would have liked to adjust that subtraction to include the discount but TT does not let you do that. So only alternative I can see is to add the subtraction to the "other"-item.

[tfgatlin]

@srr 

That was only for Alabamians.  I also found a flaw. My method gives correct tax amounts, but causes a mismatch in state income and federal income not reported to the state. It's off by the AMD. And TT does not allow a manual override of that field. I finally gave up and just did the state taxes by hand.

[yanks772]

I bought 12 secondary market bonds that materialized in 2023.  It seems that for all of them I made some money off of accrued market discount (ex. buying for 29,700 and getting back 30,000 so $300 gain for example) and other money from interest (for example $100).  I bought both Federal Treasuries and Municipal Bonds (NO corporate bonds).  It seems that my 1099-B form only lists 5 of the bonds (1 municipal bond and then 4 Treasury Notes) and not the other 7.  None of my Treasury BONDS are listed on the 1099-B, only my Treasury NOTES.  As I look through it seems that all 5 of the bonds on the 1099-B had some form of Accrued Interested (ex. the bond was between interest payments so there was $25 in accrued interest up to that point which I paid to the Bond seller and then got back when the bond materialized --- using the ex above I actually paid 29,725 and in the end at maturity got 30,000 bond + the 25 accrued interest + 100 interest due = 31,250 Total).  It seems that my other 7 bonds were reported in my 1099-INT and NOT on the 1099-R and that those bonds were very similar except for the fact there did not seem to be Accrued Interest paid for them.  I have 3 questions:

1. So I assume the 1099-R only reports bonds with accrued interest?  Since all my Treasury NOTES are on the 1099-R and none of my Treasury BONDS are, then I assume there is some difference between the two such that the way interest is paid for Treasury BONDS is done so in a manner such that Interest does not accrue or the accrued interest does not get included in the secondary market bond payment?

2. Based on the way things were input into Turbotax, the money made off of accrued market discount (ex. buying for 29,700 and getting back 30,000 so $300 gain) which is shown on the 1099-R for 5 of my bonds showed up on the tax forms as taxable income.  Since Treasury Notes are not taxed at the state/local level I assumed that the interest ALONG WITH THE GAINS FROM THE ACCRUED MARKET DISCOUNT would be state/local tax exempt.  Am I incorrect about this?  Is it only the gains on interest that are state/local tax exempt here in New York?  Also as mentioned above there were 5 of the bonds that showed up on the 1099-B and 1 was municipal so should everything associated with this secondary market municipal bond purchase be fully tax exempt or should the gain from the accrued market discount of this bond still be taxed (because it shows up on the 1099-R form and on TurboTax seems to be input as taxable profit which I did not think was the case as I thought the accrued market discount gains from municipals was still tax exempt?).

3. All of these bonds were bought for a quick turn-around and owned by myself for less than 1 year.  If I were to buy secondary market bond that did not materialize for >1 year would I be able to treat all of my gains as Capital Gains taxes?  I am in 35% Federal Income tax bracket so being able to only have to pay 20% Capital Gains taxes would make a big difference.

[baldietax]

Yes there was another thread on this topic of how to handle AMD on Treasury Notes in this forum, and across the internets (reddit/bogleheads etc).  I see suggestions here to make adjustments on 1099-INT and 1099-B etc; for Fed I just entered everything as it was provided; and on my state taxes for VA entered a misc adjustment to subtract the AMD.  Filed fine tho it was a relatively small amount for 2023, going forward I plan to use higher coupon Notes where possible to minimize this issue.