1099-OID bond premium on tax free

[jhorizonte]

Have a tax free Fed & State bond.  Entries only for box 6 of $6.12, box 10 for $10.48 and Box 11 for $6.12

No interest so am told to enter Box 10 on Schedule A.  How and why as this is tax free?

Thanks.

[Cynthiad66]

If you add this on Schedule A it is a deduction and not income.  So you are not paying taxes on that amount.

.

Box 10. For a taxable covered security, including a Treasury inflation-protected security, shows the amount of premium amortization allocable to the interest payment(s), unless you notified the payer in writing in accordance with Regulations section 1.6045-1(n)(5) that you did not want to amortize bond premium under section 171. If an amount is reported in this box, see the Instructions for Schedule B (Form 1040 or 1040-SR). If an amount is not reported in this box for a taxable covered security acquired at a premium and the payer is reporting premium amortization, the payer has reported a net amount of interest in box 2. If the amount in this box is greater than the amount of interest paid on the covered security, see Regulations section 1.171-2(a)(4).

If there is an amount in both boxes 10 and 11, for a tax-exempt obligation that is a covered security acquired on or after January 1, 2017, and issued with OID, the amount in box 10 shows the amount of premium amortization for the year that reduces the amount of your tax-exempt interest for the year. The payer may, but is not required to, report the premium amortization for a tax-exempt obligation that is a covered security acquired before January 1, 2017, and issued with OID.

Form 1099-OID

[jhorizonte]

Thanks, but I am not clear on entry.  Do I have to include the $10.48 in Box 10 on BOTH the 1099-OID entry page AND Schedule A? And how does one enter the amount? Thru the 1099-INT entry sheet?

[DianeW777]

The key is that this is not a deduction for Schedule A.  It is an expense (bond premium) paid for a bond that is greater than face value.  Because of this and if the interest was taxable, you could reduce the taxable interest income. Instead it works similarly for tax exempt interest as explained below.

Amortizable bond premium. 

If you elect to reduce your interest income on a taxable bond by the amount of taxable amortizable bond premium. But identify the amount to be subtracted as "ABP Adjustment.".  The premium is amortized over the life of the bond on a pro-rata basis.

Since this is a bond that is tax exempt, and the tax exempt interest can be reduced by the amortized bond premium, then you must manually track that and enter a reduced tax exempt interest amount for your tax return interest entry.  Manually, the reason to track the full amount of this premium that has been used to reduce the tax exempt interest is for redemption.  When the bond is redeemed (sold for tax purposes) it will reduce your cost basis in the bond for the amount used to reduce your tax exempt interest.

At the time of redemption you may have a taxable gain.

Please update here if you have more questions.

[jhorizonte]

Dianew777 thanks, but I am still unsure what to do. Re paragraph 3 there is no tax exempt interest shown. All I have is Box 6 acquisition premium $6.12, Box 10 total bond premium $10.48 and box. 11 tax exemptOID $6.12.

please provide an example of what should be entered so I can follow it.

[WendyN2]

To accurately enter in your 1099-OID, please follow these steps (it doesn't take long, just looks like a lot):

1.  Click on the tab "Personal" at the top of your screen and then just below it click on the grey oval that says "Personal Income"

2.  This brings you to the page titled "Your 2020 Income Summary"

3.  Scroll down to the "Interest and Dividends" section and click on "Visit All" - JUST to be on the safe side in case you might have anything

     accidentally lingering in the other 1099 sections

4.  Then, once at the 1099-OID section, titled "Miscellaneous Investment Income", check off the first box to the left of "From 1099-OID"

     then click "Continue"

5.  On the next screen titled "Any OID for 2020" click on "Yes" and then on the next screen that is titled "Let us enter your 1099-OID"     

     SELECT THE LAST OPTION "I'll type it in myself"  as this will ensure that all information from your 1099-OID is getting entered

     correctly into the system. I've already checked the 2020 1099-OID IRS Form and it is exactly like the one in the TurboTax System. I

     hope this helps.

[Terry1937]

I'm having the same problem.  I've read your question and the responses multiple times, but it seems the answers don't fit the question.  Did you ever get a satisfactory response? In my case, there is no entry in any box except #8 and #10.  I'm just wondering if you got your question answered/problem solved?

[mk44]

I have the same question/issue.  I only have entries in boxes 6, 10 and 11.  I get an error message from Turbo tax telling me that "the bond premium adjustment of 9.18 reported on this Form 1099-OID is greater than the interest income reported in Box 2 on this 1099-OID of 0.00.  You must reduce the bond premium amount reported on this 1099-OID to the amount of the interest income, and report any excess on Schedule A (subjiect to any required limitations). "  Does that mean I am supposed to enter 0 in box 10, even though my 1099-0ID has this amount as 9.18?  And where on schedule A am I to report the "excess"?

If this is the proper thing to do, why doesn't TurboTax do this for me?

I am using TurboTax Deluxe.

Thanks!

[jhorizonte]

The response I got was quite unhelpful — one really needs to speak with someone.   I gave up asking, checked the IRS page which was a bunch of “legalese” which provided very little assistance. I too use Turbo Tax Deluxe and they should provide more details and examples to help.  Ended up putting the info also on an 1099-int sheet. 

[mk44]

Thanks for your reply jhorizonte!  I will try replying directly to Wendy the tax expert and hope for some more clarification...

[mk44]

Hello Wendy,

I wonder if you can give some clarification.  I did type in the numbers myself for my 1099-OID.  

I only have entries for boxes 6, 10 and 11.  However, after typing in the numbers exactly, I keep getting an error message from Turbo tax telling me that "the bond premium adjustment of 9.18 reported on this Form 1099-OID is greater than the interest income reported in Box 2 on this 1099-OID of 0.00.  You must reduce the bond premium amount reported on this 1099-OID to the amount of the interest income, and report any excess on Schedule A (subjiect to any required limitations). "  Does that mean I am supposed to enter 0 in box 10, even though my 1099-0ID has this amount as 9.18?  And where on schedule A am I to report the "excess"?

If this is the proper thing to do, why doesn't TurboTax do this for me?

I am using TurboTax Deluxe.

Thank you.

[mk44]

By the way, I can get rid of the error by changing the amount in box 10 to zero, as box 2 is zero I suppose.  But this seems wrong to enter something different than what is on the actual 1099-OID.  Also, I don't have a schedule A as I will take the standard deduction.  If I understand things correctly, the entry on schedule A would be a deduction, so not entering anything won't change my taxes one bit, but this just seems like an incorrect solution, to be told to change the amount in box 10 that is actually on my 1099-OID.  Feels like a TurboTax error.

Thoughts?

[Terry1937]

Agreed.  I do NOT understand why we were told to put it on Sch A, since Sch A is for deductions and like you, I will use the standard deduction.  I also agree that this feels like an error by TurboTax.  I’ve done exactly what the program told me to do, but then it gives me an error message.  Something’s wrong somewhere and I believe it’s on TurboTax.  Or possibly by the investment company that issued the composite 1099. 

I don’t really know whether the $16 Bond Premium in box 10 of the 1099‑OID is income or not.  BUT – to work around the error that TurboTax thinks I’ve made, I moved the $16 to Box 2 and called it “regular interest” because I don’t know if it’s tax free or not.  That information is not on the 1099-OID, so I just made a guess.  $16 is not going to affect my taxes, one way or the other, but I assume it’s income and that means it should be reflected somewhere, somehow, on the tax return.  Omitting it entirely certainly will not trigger an audit, but I just feel better about including it.

As you said, this seems like an incorrect solution.  I will await further feedback from TurboTax.  Or whomever...

[excel20]

I have the same issue: tax-exempt bond with #s on 1099-OID line 10/11. I ran some tests with TT2020. Entering $$ on 1099-OID:

line 2: increases tax-exempt interest

line 10: reduces tax-exempt interest

line 11: increases tax-exempt interest

None seem to affect tax liability

So, much hunch is that tax-exempt interest on 1099-INT line 8 should instead be entered only on 1099-OID line 2. Then by entering the premium amount on line 10, the net reported tax-exempt interest will be reduced. 

I think the reason to do this is so that if the bond is sold, lower reported interest could reduce capital gains. But I am not sure how that would be calculated, or if Turbo Tax retains that information for future use. I don't see how it can since the reported interest is not tied to an individual bond. So it would seem that the OID reported interest must be manually tracked and used to adjust the basis when the bond is sold.

Note: I am not a tax professional and this is only experimental reporting.  Hopefully a qualified representative can respond and advise.

[excel20]

One additional point: Because 1099-OID line 2 increases reported interest, for a tax-exempt bond I think the interest should be reported as tax-exempt