I paid accrued interest for a bond on purchase but that bond produced first coupon payment next year

[JuiceKing]

In 2022, I purchased several treasury bonds and I paid accrued interest for them. Some of the bonds produced first interest payment in 2022 and some in 2023. For simplicity, for those which produced interests in 2022, let's assume the interest earned in 2022 is $100. And assume the accrued interest is $30 for every bond.

I understand that I can adjust the interest income to 70 = 100 - 30.

But what about those bonds that produced first interest payment in 2023?

Can I apply their accrued interest in 2022? Or should I wait until tax year 2023?

The latter seems like a pain because I have to:

1. Find them. Exclude them from 2022.
2. Keep track of all the bond transactions in previous years and look them up in later years.
3. All by myself because TurboTax does not know which bond got accrued interest or produced interest in which year. (they are not on 1099-INT)

[DaveF1006 · Accepted solution]

No, you will need to report the interest income in the year that it is paid. 

[JuiceKing]

The accrued interest I paid for the bond purchase was in 2022. The first interest of that bond was in 2023.

In which year should I apply "accrued interest" to?

[GeorgeM777]

You don't apply it to any year.  You paid accrued interest to the original owner because that original owner held the bond during some part of the interest-bearing period.  Thus, the original owner is entitled to their share of the interest that has already accrued.   When the bond pays interest, you will receive the full semi-annual amount (assuming the bond pays semi-annual interest); even though you did not own the bond for the entire semi-annual period.  You make up for that by paying the original owner for their share of the accrued semi-annual interest.  

If you were to sell the bond, you too would be entitled to some part of the interest that has already accrued while you owned the bond.  The buyer would pay you the portion of the accrued interest.  Moreover, you would report that accrued interest on your tax return. 

@JuiceKing 

[JuiceKing]

When the bond pays interest, you will receive the full semi-annual amount 

That is the problem. I am being taxed on the full semi-annual amount.

What I believe is I should only be taxed on the "full semi-annual amount MINUS accrued interest I paid ".

Think about an extreme case when someone buys a bond which will pay coupon next day. Should the buyer be responsible for the tax of the full coupon interest? I think NO.

[SteamTrain]

Like @DaveF1006  kind-of implied....you wait until your 2023 tax return to report it.

Your 1099-INT for that year will show the full interest for everything you own at that brokerage, in boxes 1,3,8.....then there is a follow-up page where you check a box, indicating you have an adjustment to make, and on another page you check the box for accrued interest, and enter the amount accrued interest amount you paid to the seller....effectively reducing the interest reported as being received

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And then the complications
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...........another issue potential accrued interest issue...if your 1099-INT is a mix of box 1, 3, and 8 in any combination. Then the all the bond interest for that  bond type  should be removed from that combined 1099-INT and entered on its own 1099-INT.  (not needed if you have no accrued interest to report on any of them)
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Example:  You bought a Muni bond , and paid the seller for the accrued interest that you will report for 2023. The Muni bond interest is reported in box 8,  but that 1099-INT might also have box 1 and/or box 3 $$ on it.  You need to remove all of the box 8 $$ (along with boxes 9 & 13, if any) and put box 8 (and 9&13) onto it's own 1099-INT before indicating it's accrued interest.  IF you don't, the accrued interest will be divided up proportionately (and improperly)  among boxes 1, 3, and 8

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At least, that's how it's handled for tax-exempt Muni Bonds.

For Muni bonds, any Premium amortization (for any premium you paid, other than the accrued interest) will be reported in box 13

[sterlinghts043]

interest paid on US Treasury purchase 12/22/22, income received in 2023. where do i report the int deduction from the 2022 purchase. there was no interest income in 2022.

[Mike9241]

it's not deductible in 2022. in 2023, the year of deductibility, it will offset the income you received.