Accrued Market Discount on treasury bond

[HarrieNY]

I have a 1099-B showing a $12,000 accrued market discount for a treasury note that was redeemed in 2024. Coupon interest is on my 1099-INT of this year and of 2023,  so this seems to be fine.

I entered this in Turbotax under the short-term sales category,  where it is on the 1099-B.

I understand that the IRS treats this 'gain' as interest,  but I am not clear how to get Turbotax handle it this way:  should I check the box "I need to adjust my total tax basis"?

If so,  should  I then check the box D (accrued market discount) and enter  "total adjustments"  of $12,000 or  -$12,000?     If I enter -$12,000 it seems result in no extra federal tax;   if I enter $12,000 it seems to result in double federal tax.

If I put $0 adjustment,  it seems result in the correct federal tax,  but it shows as a capital gain,  not interest.

(I am in NY,  so I understand I would have to correct the state section separately to avoid being taxed there)

What is the best way to enter this in Turbotax?

[baldietax · Accepted solution]

You shouldn't need to do any adjustments just enter all the boxes the way the 1099-B came... but I am guessing the issue is you need to input it as "one by one" which gives you Box 1f to fill in, which is not available when you put it in as a "sales total" summary level.  TT will then flip the box 1f over to your Schedule B.

[baldietax · Accepted solution]

just to add, I see the AMD "D" code you are referring to on the sales total screen and both ways of doing seem to create an 8949 with code D, but doing it as sales summary method (with negative amount as the adjustment is to gain/loss to bring it to zero) doesn't seem to flip it Schedule B, as you've noticed.  Also any adjustment made to a summary total will trigger TT to tell you to mail paper statement to the IRS.

Anyway - last year I had a note with AMD and put it in as "one by one" which worked fine, it will generate Form 8949 with the code D and adjustment of gain/loss; and didn't need to mail anything to IRS (I do this for any wash sales also).

[HarrieNY · Accepted solution]

I re-entered the sales of my bonds in Turbotax one-by-one instead of by category and this indeed solved the problem.  And I also got the message earlier that I needed to mail the 1099-B to the IRS,  which has now disappeared.

Baldietax,  thank you very much for your help;  I really appreciate it.

[Taxi_Nerd]

Adjustment code D on Accrued market discount. re 1040 Sched B and NY State IT -201- A TurboTax Adjustment worksheet is triggered when you enter an adjustment code D and a negative value representing an Acc Mkt Disc. on a matured US Government Bonds/Notes on the 8449 based on a reported 1099-B column code 1f. You will see that it can relocate the adjustment value to your Sched B with the label "accrued marker discount" by using the lower section of the same adjustment worksheet page. However, adding the state code "NY" in the same lower section of the worksheet does not increase the US Govt Interest income Subtraction amount on IT-201 page 2. I think it has to be overridden manually with the full US Govt Interest income including the AMD adjustment. This does not invalidate the state e-filing.  Make sure you can fully support the overridden amount as bona fide US Govt interest income.  If you do not override you will lose the State Subtraction of the AMD.  How are you adjusting your NY State Subtraction? Can anyone else chime in on howe to best process this NY State Subtraction? 

[taxmodeler]

I also discovered this error in TurboTax. It does not correctly adjust Form IT-201, line 28, for this accrued market discount on US Treasury bonds. I did an override, and then when I went to e-file, TurboTax says that it cannot e-file with an override so I have not yet e-filed my New York return. It seems like it is a bug in TurboTax. TurboTax correctly handles the accrued market discount in my California return.

EDIT: TurboTax does *not* correctly handle this accrued market discount in the California return. I manually made the adjustment but without having to override anything. See my other reply in this thread if you want to know where.

[baldietax]

How are you/Turbotax handling this for CA - there is no place to designate AMD on 1099-B as US Gov related?

There are several threads on this topic but no one has reported that it works in any state, it's just a gap across the board (and open to ambiguities and interpretation of tax code in each state - except NC that had a court ruling against the exemption - but TTX could at least provide the option)

[taxmodeler]

Sorry, you are correct in that it does seem to be a gap across the board that TurboTax is not properly handling accrued market discounts in state forms. I was able to fix it in my CA return because there is an Interest and Dividend Adjustments Worksheet for CA. In Line 12 of that worksheet, you can add adjustments in free-form, so I made one for the accrued market discount.

[triboluminescence]

Thank you for the work-around to the accrued market discount subtraction. My interest is from T-notes purchased below face value and held to maturity. I see conflicting opinions on whether the interest is exempt in CA, something I had taken for granted. Someone has even posted a reply from the Franchise Tax Board stating that the accrued discounts are considered taxable income. Has anyone found something in the CA tax code that addresses this?

Editing to say that I think the taxable treatment only applies to bonds purchased at a discount, not to original issue bonds/notes held to maturity.

[Taxi_Nerd]

taxmodeler - have you successfully been able to e-file your NY State return with the line 28 AMD code D subtraction adjustment? I haven't tried to e-file mine yet.

[taxmodeler]

I overrode line 28 and attempted to efile, but of course, TurboTax will not allow that. So I haven't filed yet.

[Taxi_Nerd]

Unfortunate outcome. So, there seems to be no solution for an accurate NY State line 28 subtraction at this time.