How to report accrued interest paid on bonds purchased

[jman3]

My combined 1099 form has a page with supplemental information not reported to the IRS, which includes an amount for "accrued interest paid on purchases." I understand that when I buy a bond, I pay the seller for the interest that has accumulated from the last coupon to my purchase date.

Do I need to input this amount into Turbotax when I put in my 1099 (in case it adjusts my interest, dividends, capital gains, etc.)? Or would this amount already be factored into the 1099 numbers, and there is nothing else that I need to do with that information? Thanks!

[AmyC · Accepted solution]

No, the seller also receives a 1099. They report the accrued interest. See 2022 Instructions for Schedule B- IRS

[dmbspring]

The question was about interest paid, not interest earned.  I think the accrued interest paid on bonds purchased should be an offset against the interest earned on those bonds. Is that not correct?   If I am right, then it appears I need to do a manual override in TurboTax.

[MarilynG1 · Accepted solution]

You can enter the accrued interest adjustment in the 1099-INT section of TurboTax. 

Follow these steps to make an adjustment for the accrued interest paid on your taxable bonds:

1. Select Federal Taxes
2. Under Wages & Income select Interest on 1099-INT
3. Enter your 1099-INT information, select Continue
4. Select I need to adjust the taxable amount, select Continue
5. Enter the accrued interest paid in the Adjustment box
6. Select the Reason for Adjustment as My accrued interest is included in this Form 1099-INT

@jman3 

[RayRomano]

I followed your instructions, however, the adjustment amount does not appear on schedule. How do I get it to appear?

[RayRomano]

Never mind it does appear on schedule B.

[ChacChan]

MarylinG1,

Your detailed step-by-step answer to this important question is OUTSTANDING.

The only thing I would add is that it's good to point out that the accrued interest when purchase bond is for the seller to report and for the buyer to deduct from the 1099-INT interests paid.

[ChacChan]

This is useful but stops short of giving the instructions on how the bond buyer use TurboTax to deduct the accrued interests from the 1099-INT interests

[Murray1949]

ChacChan - MarilynG1's 6 steps shows exactly what to do. You are adjusting the 1099 amount, lowering it by the amount of accrued interest. That accomplishes exactly what you need/want to do.

[jksmithpa2]

Turbo Tax Home and business 2024 is confusing on this point because: suppose you sell a US t-note you bought at discount and report the discount paid to you (line 1f on the 1099-B) using your broker supplied data.. Then on the next TT page you can check the box that "accrued interest ... is reported on a 1099-INT".

On the TT page after that it suggests that you should check your cost basis and maybe make an adjustment. Clearly if I look at my cost basis for the bond reported by the broker on the 1099 B, it will be lower than what I paid because I also had to pay the seller accrued interest. 

So there seem to be two ways to get to the right answer: 1) deduct using a 1099- INT or 2) go back and increase the cost reported on my 1099B to reflect the accrued interest I paid the seller.

It is confusing that TT seems to offer two ways to do the same thing.

Advice, please.  

Which should be used? The second contradicts what the broker says

[Murray1949]

jksmithpa2, it is going to all be dependent how your broker is reporting the numbers. 

The 1099-INT and 1099-B are independent. If your broker included the accrued interest in the year you purchased in the 1099-INT, then utilize the accrued interest adjustment TT offers. If your broker also includes the accrued interest paid at time of purchase in your cost basis on your 1099-B in the year sold/matured, then you should adjust that number.

Now, not to complicate things further for you, but, while doing all this, pay close attention that the information is properly flowing to your state tax forms. Don't just assume that it is.

[sotampacane]

This worked.  It's worth noting that the adjustment entered should be a positive number even though it is reducing your interest income

[rhugg3]

Except the adjusted Interest does not flow to the NJ State 1040. Also you can not edit it on the NJ Adjustment Page.

[Murray1949]

I have not done my NJ returns yet this year, so thanks for mentioning that. If all else fails, either 1. Edit the original 1099-INT value(s) decreasing by the accrued interest amounts or 2. Manually create a new1099-INT form in the Federal return with total of the negative amounts for the accrued interest in the original 1099-INT. For the broker name make it "Accrued Interest Paid on Purchases". Do this with no adjustment code(s) and that should (hopefully) force it to flow into to the NJ state return as a negative number and then your net 1099-INT amount should be lowered accordingly.

[DianeW777]

The process explained will allow the numbers to flow to your state return (NJ) the way they should, specifically number one.

• 1. Edit the original 1099-INT value(s) decreasing by the accrued interest amounts
• 2. This is not necessary and a negative number may cause an unwanted experience.

You are not required to pay tax on money that has already been taxed. The accrued interest you paid was for the purchase of the bond(s) between maturity dates. Remember to use that amount as part of your cost basis when redeemed.

Keep your 1099-INT in your tax file with notes to explain what you did and why, should you need it later.

@rhugg3 

@Murray1949