How to adjust interest reported on 1099-INT for accrued interest of a newly-purchased bond?

[phraxos]

When entering/reviewing a form 1099-INT, TurboTax allows entry of an adjustment for accrued interest that was part of the bond's purchase price. But it does not allow a way to indicate if it applies to taxable interest (box 1) US government interest (box 3) or exempt interest (box 8).

I experimented, and found the 2022 desktop version of TurboTax does the following.

If the 1099-INT shows interest only in box 1 or 3, TurboTax appears to reflect the adjustment as a separate line on Schedule B. This is the correct procedure according to "Accrured Interest on Bonds" in Publication 550. However you would have to be careful that the adjustment is correctly reflected on a state tax return, since the state may tax regular and US government interest differently.

If the 1099-INT shows interest only in box 8, TurboTax reflects the adjustment (a positive amount) by subtracting it from 1040 box 2a. This seems sensible. Note that the amount in box 2a can be critical for people with Medicare since it contributes to modified adjusted gross income (MAGI) and small differences can severely impact your premiums.

If the 1099-INT shows interest in more than one of boxes 1, 3 and 8 (which is not uncommon for a brokerage account) it is not at all clear how TurboTax could make a proper adjustment.  Perhaps the TurboTax team can explain better how this would be handled, and improve the software to allow the user to specify a separate adjustment for each type of interest.

[SteamTrain]

@phraxos 

Correct on all counts.  TTX desperately needs to make some software improvements to be able to delineate, on the follow-up page, after the main 1099-INT form, exactly which type of interest the accrued interest you paid out is being referred to.

Thus, if you paid any accrued interest to the seller of any type of bond (corporate, or US treas, or Muni), currently the only way the software can handle it properly is for you to create a separate 1099-INT, as-if coming from that issuer that contains only the box 1, or3, or 8 $$, along with declaring the accrued interest you paid for that particular bond type.  (note also that the boxes 1&11 or 3&12, or 8&13 must also go together on the separate 1099-INT when this is needed).

 Thus, since I buy Muni bonds most every year, I always have to remove all of the box 8,13 values from the brokerage's 1099-INT, and transfer into a separate 1099-INT and report the accrued interest I paid out on any  Muni's I bought.

AND ALSO, if you are living in a state with income taxes, and you want to declare bond interest from your state's Muni's, so that they don't get taxed by your state...then you might even need to break up the box 8, 13 & accrued interest, into the $$ relative to your state, and $$ from all other states, into two separate 1099-INT forms (I usually don't bother with this, since I get so little from my own state's bonds, that it's not worth the effort)

[phraxos]

Thanks SteamTrain, your observations seem to confirm mine.

However I still hope someone can point us to definitive information in the TurboTax help, or at least speak authoritatively on behalf of Intuit about exactly how users are supposed to handle these situations.