Accrued Market Discount on Treasury bonds

[sorka95032]

@DMarkM1 HI Mark. For California, others seem to be handling this by doing and adjustment for AMD line 12 of the Interest and Dividend Adjustments Worksheet but I'd much rather than fix this on the federal return as I don't really want to get into a fight with the FTB over federal law. Since the feds already count AMD as Interest on Schedule B, I'm confident that I don't have to pay California income tax on despite the fact that at least one person here seems to have gotten a reply from the FTB contrary to this. 

It seems that the way you're suggesting to fix this ultimately moves the AMD amount in 1099B 1f to 1099-INT box 3. Am I reading that correctly? Won't the IRS get upset that I'm reporting something different than the 1099s they got from my broker even if it doesn't change the federal tax?

[sorka95032]

@tfgatlin , did you see @DMarkM1 's earlier reply about moving the box 1 amount (in this case box 1f) from the 1099B to box 3 of the 1099-Int? If you do that, then it will transfer to all states correctly as box 3 interest on federal obligations.

[tfgatlin]

I did, but I don't like dinking with official IRS forms. It also works if you add it to the interest income worksheet of your state. BUT, it makes your none taxable federal income mismatch that on your state form. I tried another tax program that flat out asks if the AMD is from Government obligations. If you say 'yes' it fixes everything perfectly. So the problem is TT.

[sorka95032]

@tfgatlin When you say you used another program and it fixed it for you, how did it fix in the actual forms? Did it adjust the state or did it make a change to the federal form so that the AMD was treated as box 3 interest? There are very few options, so if you can state what the actual effect was on the federal and state forms, that would be of great interest (no pun intended 🙂

[tfgatlin]

It knew exactly what to do. It stayed on Schedule B as taxable interest and transfer to the state form as tax-exempt interest. Both state and federal forms were correct.

[sorka95032]

@tfgatlin OK, but the only way it could have done that on Schedule B is if it included the 1f amount in Box 3 on the worksheet which would not match the 1099-INT.

The AMD amount couldn't have been included on line of the Schedule B as that's only for EE and I Bonds. The 1099-OID and DIV sections of the worksheet also don't apply.

[tfgatlin]

AMD came in on my 1099-B and is reported on the 8948 as a Capital Sale. Line 1f brings the capital gain to zero. The AMD then goes to Schedule B as Interest. TT then carries that to the state interest worksheet as taxable interest. The problem with TT is that it never asks if the AMD is from a Government bond or not.

BTW, I'm not an accountant or tax person. The probability of being totally wrong about everything I say is pretty high.

[sorka95032]

@tfgatlin So that's the same thing that TT did with my Schedule B. The problem is, the interest on line 1 of schedule B that isn't included in Box 3 gets carried over to CA as taxable interest. 

What I want to know is what tax program you used and what did it do to Schedule B and 8949 so that it didn't carry over to CA as taxable interest?

Even though you're not a tax expert, the reason why I asked you which program you used that seemed to deal well with this, that program was written by tax experts so I'd be inclined to try it myself to see what it did.

[tfgatlin]

@sorka95032 I figure TurboTax will ban me for mentioning a competitor program, but I don't really care. It was FreeTaxUSA. The difference is simple, it ask the question whether the AMD was from a Government bond or not. If you answer no, it carries it to the state as taxable interest. If you answer yes, it carries it as tax-exempt to the state. TurboTax doesn't ask the question and carries everything over as taxable. I went back and answered no to the question and my state adjusted gross income increased by the AMD amount. I recommend you go to the website and give it a try. Answer yes and no to the AMD question and see the difference. You have to paid to get the actual state return, but it will give a state summary for free where you can see the difference. Let me know how it goes.

[sorka95032]

@tfgatlin Really appreciate the response. As far as I can tell, the only way to carry 1f gains over to CA without overriding 1f and adding to box 3 is to add an adjustment to taxable interest on in the CA Interest and Dividend Adjustments Worksheet in Line 12 Column B. Others suggested that's what they did manually in some other threads but nobody replied what they used for the description in column a.

If you're saying the adjustment was made on the federal return so that Line 1 of the  Interest and Dividend Adjustments Worksheet worksheet already includes the AMD, then the only way to make that adjustment is to adjust Box 3 of the 1099-INT since Line 1 of the CA form only includes Box 3 interest of the 1099-INT.

[tfgatlin]

@sorka95032 For a description I always use: "1000.00 US Treasury Note, Accrued Market Discount", where 1000.00 is whatever value it is. Same as what comes up on my Schedule B, line 1. Then enter the interest (AMD) in the exempt interest column. It's 100% honest in case they disallow it. But it causes that mismatch in Federal reported income not reported to the state, if CA has such a line. AL does.

[vryconfused]

Thanks. If I don't make adjustments (deleting box 1f) TT puts the capital gain on the 1099-B to interest on Sch. B & taxes at a higher rate and leaves the capital gain as 0. The brokerage firm insisted that discount is a capital gain and the interest on that bond is already on the 1099-INT. I had only one treasury held for 1-year, so only one to enter. I did receive the 1099-INT with the Treas. interest in Box 3, but Market Discount (Box 10 on the 1099-INT) = $0, as someone else posted. The 1099-B for the treasury bond shows the Accrued Market Discount in Box 1F, which does not match the 1099-INT Box 10. Are you saying those boxes on those forms should match and there is an issue on the paper statements? 

[baldietax]

Just to confirm are you talking about a Treasury Note or Treasury Bill, if you have the cusip and trade/1099 details that may help.

For a T-Note, the 1099-INT and 1099-B amounts shouldn't match, these are two different types of income you are getting on the bond at maturity which combine to give you the yield:

1099-INT should be reporting your coupon interest (i.e. coupon * par)

1099-B Box 1f should be reporting your accrued market discount (i.e. par amount minus cost amount) which will go onto Schedule B as "Accrued Interest" (not to be confused with accrued coupon interest paid or received during a buy/sell).

For example 10k of T-Note 91282CAM3 assuming held exactly 6 months (no accrued coupon interest paid on purchase) maturing 9/30 with coupon 0.25% priced at 98 (say), interest will be $12.50 on 1099-INT Box 3, AMD will be $200 on 1099-B Box 1f; total income reported on Schedule B = $212.50.  Compare to a 4.25% Note priced at par for the same dates would pay $212.50 on 1099-INT Box 3 and AMD will be zero (but still reported on 1099-B).

I've seen some other posts where Treasury Bills are being reported on 1099-B also, but they should really just be reported directly on 1099-INT Box 3.  Treasury Notes behave differently.

[tfgatlin]

@vryconfused  No they didn't match. I assume AMDs don't have to be associated with Treasuries, thus taxable by everyone. The problem is TT never asks you the source of the AMD. If it did, I believe Treasuries should be carried to the tax-exempt interest column of (some) state taxes

[tfgatlin]

@baldietax I am talking about Treasury Notes. You are correct, Bills go directly to 1099-INT box 3, then no problem. Notes go through this AMD business and 1099-B. The problem is it's carried to the state as taxable interest because TT doesn't know it's from a Treasury Note. And there's no way to tell it. Other tax programs ask if the AMD is from a Treasury or not, then handles it correctly.