How to deal with 1099-INT Box 13: Bond Premium on tax-exempt bonds?

[470167462a]

Hi,

I am wondering how do I deal with 1099-INT Box 13: Bond Premium on tax-exempt bonds?

I found some answers that I need to adjust the taxable amount and use negative number to offset the amount on 1099 with reason for adjustment as: I amortized a premium I paid on a tax-exempt bond.

However, I saw the 2020 Turbotax has "other deductible expenses" section which I can enter amortized bond premiums, is it the same as manually adjust the taxable income? which method is correct?

[PattiF]

Actually, there is not a deduction for the premium you paid for your tax-exempt bonds on your federal return.  You are required to amortize the premium each year and this will reduce your basis (what you paid).  So when the bond matures, your basis will be the face value of the bond.  Generally, there will not be a loss.

For tax-exempt and taxable bonds, this adjustment happens automatically when you enter the amount from Box 13 and Box 11 in the 1099-INT section of TurboTax.  The adjustment will reduce your amount of reportable tax-exempt interest on Form 1040, line 8b.  For taxable bonds, the adjustment will reflect on Schedule B, Part 1.

If adjustments for bond premiums are not reflected on your 1099-INT, you can manually enter the bond premium adjustment in the 1099-INT section of TurboTax.  This is also where you can report any accrued interest paid.

Follow these steps to make a manual adjustment for the bond premium you paid on your tax-exempt and 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 state that pays your tax-exempt interest, select Continue
6. Enter the amount of your premium adjustment (use a negative number if you need to add to the interest reported)
7. Select the Reason for Adjustment

[dfun470]

I think I understand this, finally, although I've been doing this for a number of years.   A couple of clarifying questions.

Federal treatment is as you describe above and the amortization of Bond Premiums -which I have- is required and done for me by bond on my Composite 1099.  If it is only the premium paid in the specific tax year on bonds purchased in that year (Box 13) which matters, is there any need to entire the year's bond premium amortization (different in amount from box 13) via an adjustment?  Is the IRS looking for that number? 

Now, looking at the state tax situation, where all out-of-state bonds will now be taxable, shouldn't the accrued interest and purchase premium be applied to each bond individually, so that in-state and out-of-state bonds which will have different tax treatment, all reflect the true net interest earned?   I seem to recall being able to do this on a bond-by-bond basis (just as the state-by-state interest is entered) on a previous (perhaps online) version of TurboTax.

In the absence of such individual treatment, are the accrued interest and the bond premium split evenly across all bonds?  -or perhaps proportionally by bond interest value or by bond interest value by state?

[HeiKei76]

Where do I input treasury bond interest from a 1099-INT?

[MarilynG1]

You have a choice.  First, you can choose to add this to the cost basis of the bond which would reduce gain on the redemption/sale in the future.  

Or, if you choose to reduce the tax exempt interest by the premium paid for the bond, it must be amortized. 

Click this link for more info on 1099-Int Box 13.

[chazsf]

I followed the instructions from steps 1 through 5, and then got a "Done" message, with no chance to enter my adjustment for accrued interest paid.

This is in Turbotax Deluxe for 2023.

What gives?

[PaulaM]

You'll see the chance to enter the adjustment for accrued interest paid on the page that reads 'Tell us if any of these uncommon situations apply'. Check the first box 'We need to adjust the taxable amount' and continue to enter your accrued interest adjustment.

[chazsf]

My first 1099 INT reads as follows:

Interest Income 17.43

Tax-Exempt Interest 1625.00

Bond Premium 421.86

plus a separate note for:

Accrued Interest 1383.74 which Turbo Tax records in RED as an error.

The entry is correct, I think Turbo Tax just does not know what do with the excess over the Tax-Exempt Interest.

My second 1099 INT reads as follows:

Interest Income 658.73

Tax-Exempt Interest 5178.13

Bond Premium 1114.26

plus a separate note for:

Accrued Interest 3557.49 which Turbo Tax accepts as correct.

However, if Turbo Tax added the two 1099s together, it would get:

Interest Income 676.16

Tax-Exempt Interest

Bond Premium 692.41

plus a separate note for:

Accrued Interest 1873.75 which I think Turbo Tax would accept as correct.

How can we fix this issue?

[chazsf]

Correction to First 1099 INT:

Accrued Interest 1683.74 which Turbo Tax records in RED as an error.

[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". Read the Learn More link that appears, and enter the adjustment in the box provided.

Any amount of accrued interest you cannot deduct can be carried forward to the next accrual period. If this is your situation keep your records to record the amount later that you were unable to use in 2023.

See this thread and this one for more discussion and examples.

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

[Frank1950]

My friend bought his tax-exempt bond at a premium. If he uses the constant yield method, it effectively amortizes the bond over the entire remaining life of the bond. The premium amortization doesn't change the fact that the bond interest, minus its premium amortization, is tax-exempt anyway. But it adjusts his cost basis so that the unamortized portion of the premium can be deducted if he prematurely sells the bond or it is called early, right? 

If a broker subjectively amortizes the premium up to the earliest call date, the premium amortizes very quickly and the ACB is the par value at time of call. There exists no absolute certitude that a bond will be called.  Otherwise, the maturity date totally becomes irrelevant and the YTM calculations made by the broker are perhaps misleading.  Depends on the course future interest rates and circumstances of the Issuer or of the bond markets.  Why is the broker making that judgment (i.e. amortizing to the first call date)? Is this cast in stone? Can we not substitute the ACB at time of call to the ACB derived from amortizing the premium up to the maturity date, using the IRS prescribed constant yield method?  What's your opinion?