Purchased Interest

[Momofsix1]

My 1099 has a Supplemental Tax Information listing PURCHASED INTEREST.  Do I need to include this on my tax return and if so, where?

Thanks

[DianeW777]

No.  Only report the amount you received on Form 1099-INT on your tax return.  Purchased interest may be an amount you paid for the accumulated interest on bonds that accrued before you bought the bonds that haven't yet matured.

You can reduce any interest income on the bond for amounts you actually paid for interest when your purchased it.

[Momofsix1]

So if my 1099 is showing some PURCHASED INTEREST as Supplemental Tax Information  where do I enter it to reduce the amount of interest listed in the 1099?  

Thanks

[DianeW777]

It depends on what 1099 you have.  If it's a 1099-B or a 1099-INT use the information below.

My advice is to report the accrued interest as interest income (Form 1099-INT) instead of 1099-B.  There you can make your adjustment for the portion of accrued interest you paid at purchase.  If you are reporting Interest income on a bond that had accrued interest at the time you purchased, then 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. 

Open your TurboTax return:

1. Search (upper right) > Type 1099int > Click on the Jump to... link
2. Enter your interest income > Continue > Select 'I need to adjust the interest reported on my form'
3. Enter the adjustment amount (accrued interest at purchase) > Select 'My accrued interest is included in this 1099-INT'
4. This will accomplish the correct taxable income for your return.

[JaneChen]

In Turbo Tax there is an option "My accrued interest is included in this 1099-INT" to interest adjustment.  However, my 1099-INT does not have an item "accrued interest" , my broker provided supplemental documents for accrued interest but not reported to IRS. Should I still choose "My accrued interest is included in this 1099-INT" or "other reasons" ?  Thanks.

[RobertB4444]

if the accrued interest is not reported to you on a 1099-INT then you can ignore it for tax filing purposes.

@JaneChen 

[baldietax]

@JaneChen if you paid accrued interest when you bought a bond, then that reduces your taxable income in the tax year the first coupon is paid to you.  For example if you paid $50 accrued interest on a bond and on the first coupon date after purchase you received $200, then your taxable income is $150.  Your 1099-INT will report $200 and the supplemental info from the broker may show that you paid $50 in accrued interest.  The $50 should be entered as an adjustment (as a positive number, TT will subtract) after the interview questions for the 1099 and your Schedule B will report the net amount of $150.

Brokers are not required to track and report accrued interest to the IRS it's up to the bond holder to manage it.

2 caveats:

1. I said "may show" above - the broker may report the accrued interest in the year you paid it not the year you received the first coupon and aren't obligated to show how they line up or get carried over if they fall in different years.  Some do it better than others.  So if you bought the bond in 2023 in this example it may get reported in that appendix in your 2023 consolidated 1099 statement from the broker, but should be applied against the interest reporting on your 1099-INT for 2024.

2. If your 1099-INT has multiple income types i.e. Box 1, 3, 8 and any of them have accrued interest, TT doesn't know which box to apply the accrued interest against and will try and apply it across all them which will affect your Fed and/or State taxes.  If you have this situation you need to split the 1099-INT into parts along with any associated boxes for premium etc (e.g. Box 3 and Box 12 stay together).

Gets a little complicated depending on your situation but unfortunately goes with the territory of holding individual bonds.

[JaneChen]

Thank you !

@RobertB4444