Do I subtract amount of 'taxable accrued interest paid' from box 1 'interest income' on 1099-INT thus reducing interest income amount?

[kerriP · Accepted solution]

If this is reporting Interest income on an instrument like a bond that had accrued interest at the time you purchased, then yes, you would reduce your interest income by the accrued interest at your purchase date.

[StuT]

But you need to report the full amount of the interest and then enter the Accrued Interest paid as an adjustment to reduce it.

[skinnypaulm]

Where do I enter the taxable accrued interest in Turbotax?  I don't see a spot for it.

[StuT]

In Forms there is a place at the bottom of the 1099-INT form.  In interview I think there is a question asking if there are any adjustments, that should lead you to it.

[GaryRo]

Yes, in the interview it asks for Adjustment and it ends up on the INT-99 form bottom.  HOWEVER, for some reasons, it is not propagated to schedule  B interest adjustment part,  I did it manually. 

[Phicro]

Where/how do you subtract the accrued interest you paid?  It seems weird this is not done by the brokerage company that reports the interest. 

[MonikaK1]

If you are reporting Interest income on an instrument like a bond that had accrued interest at the time you purchased, then yes, 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. 

When you see the screen "Do any of these uncommon situations apply?", check the box that says" I need to adjust the interest reported on my form" or "I need to adjust the taxable amount". Read the Learn More link that appears:

Accrued Interest: You purchased a bond between interest payment dates and had to pay some up-front interest for the days you didn't own the bond. This means that part of the interest payment you are reporting actually went to someone else - probably the previous owner of the bond. You'll need to subtract the amount that went to someone else.

... then, enter the adjustment in the box provided.

See this thread for another discussion of this topic.

See here for more information from the IRS on this topic.

[JG57]

What if all my bonds are non-taxable municipal bonds? I am getting an accrued interest subtraction on Schedule B, but since the bonds are non-taxable, I think the subtraction would go against non-taxable interest and not appear on the return. Also, how can I determine how the amount is calculated? Nowhere can I find a schedule or calculation worksheet showing how the amount is derived.

[MonikaK1]

As you noted, municipal bond interest is tax-exempt, so the total interest isn't taxable. However, if some of the tax-exempt interest falls under the definition of accrued interest, it must be taken into account by subtracting accrued interest from the total tax-exempt interest to arrive at the amount of tax-exempt interest that is attributable to the purchaser.

From the Instructions for Schedule B:

Enter the total on line 2a of your Form 1040 or 1040-SR. However, if you acquired a tax-exempt bond at a premium, only report the net amount of tax-exempt interest on line 2a of your Form 1040 or 1040-SR (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year).

In TurboTax, if you indicated when entering the 1099-INT that you need to adjust the interest, you will see this follow-up screen:

See the highlighted section if your form contains more than one kind of interest. In that case, create a separate 1099-INT for each type so that the adjustment is applied to the appropriate type of interest.

If you received any tax-exempt interest (including any tax-exempt OID), such as from municipal bonds, each payer should send you a Form 1099-INT or a Form 1099-OID. In general, your tax-exempt stated interest should be shown in box 8 of Form 1099-INT or, for a tax-exempt OID bond, in box 2 of Form 1099-OID, and your tax-exempt OID should be shown in box 11 of Form 1099-OID. 

If the calculation of the accrued interest isn't clear from the documents you were provided, contact the payer.

See IRS Pub. 550 for more information.

[Brian94582]

I understand all the answers in this thread. My question is: Why doesn't Turbotax import it for me automatically from my Broker 1099 so I don't have to do this manually. If the answer is because the amounts are not reported to the IRS, why not? As a result, my Sched B totals don't match with what HAS been reported to  the IRS.

[Phen]

Thank you for your answer.  I have a few follow up questions:

1. By the definition for the "accrued interest paid," isn't it true that one can't have an accrued interest paid reported, if he/she didn't receive any interest on a bond (let's call it Bond A) in a given tax year?  However, I have seen one Form 1099 from a brokerage that reported such a thing.  Can you explain under what circumstance this will happen?

2. I will use a made up case to illustrate my question. Supposing a brokerage firm reports the following information in a 1099-INT

Line 1 Interest Income:  $20,000  (Note: all are from two types of security: Bank and taxable bond.)

Line 3 Interest on US Treasury security: $10,000

Line 8 Tax-exempt interest: $1,000

This brokerage also reports a $800 on the line of other accrued interest paid in the table of "Distributions and Charges." All of this amount are from either the taxable bonds or Treasury securities.

My question for this case is:

Do I need to create separate 1099-INTs for each type of security such as taxable bond, tax-exempt bond, bank, and treasury securities?  What happens if I don't do it and just enter the $800 as the adjustment to this single 1099-INT that is imported directly from the brokerage?

3. How may I create the separate 1099-INTs for each type of security when they are reported by the same firm?

Thank you in advance for your help!

[RobertB4444]

You only need to enter the 1099-INT as you received it.  All the numbers are already in their correct boxes and the system will use them as they are entered to adjust the necessary totals and enter them on the correct forms.

Accrued interest can be paid to you and remain in the account instead of being distributed to you.  It doesn't actually have to be sent to you to be taxable.  It just has to be earned.  

@Phen