Treasury accrued interest paid limit

[Philosopher7]

My situation: I have 2 taxable investment accounts both of which earned interest income. One had $2000 Treasury accrued interest paid on notes that only earned $400 in treasury interest due to the timing of their purchases. The other account earned $6000 interest income (non-Treasury). TurboTax flagged it when I adjusted my Schedule B for accrued interest paid because the $2000 was more than the $400, I assume because I am only able to apply the accrued interest paid reduction up to the amount of Treasury interest I received in the same tax year?

I can find no information on irs.gov or online stating this restriction.

Can I not deduct the entire $2000 off my total interest income from all sources? If not do I carryforward the unused $1600 to next year when I earn the bulk of the treasury interest?

I can force it into TurboTax and it does reflect the entire $2000 as an Accrued Interest reduction on my Schedule B, but it still flags it as an error.

Thanks!

[SteamTrain · Accepted solution]

@Philosopher7 

OK... you can only declare and subtract the accrued interest for a purchased bond.....after, and for the tax year that you-yourself get the first interest payment on that bond.

Thus, for Treasury bond interest received & reported in box 3 of a 1099-INT, your accrued interest declared, cannot exceed box 3 for 2022.  As a further restriction, you can only enter the accrued interest for the actual bond(s) that that generated the box 3 $$.  Thus, for the remaining accrued interest on the other bonds, that won't send you interest $$ until 2023...those accrued interest $$ will only be declared next year when you file your 2023 taxes.  AND, you need to keep those detailed records/spreadsheet/notes yourself about how much was already declared and what remains for each bond. 

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SO, as an example....for the $400 of Treasury interest you did recieve....if the $400 came from one bond....that you paid the seller (say) $150 of accrued interest...you only declare that $150 as accrued interest for 2022...you can't use the accrued interest from other bonds to negate the $400 total.  So in this example $250 of interest would remain taxable for 2022.

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Other: whenever you have accrued interest to declare for bond-types you own...always split out, and report them and their accrued interest in their own 1099-INT.  Many times, a broker will issue a 1099-INT with boxes 1,3,&8 on the same form....if you declare your allowed accrued interest on that same 1099-INT form (in the software) the accrued interest will be improperly applied proportionately among the $$ in boxes 1,3&8........Thus, for whatever bond-type has accrued interest to declare, you need to break out that bond-type into its own 1099-INT. 

(This is a software thing...some day TTX may have the follow-up page split out the accrued interest into three separate lines for each bond-type...but they haven't yet done so)

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1) For purchased corporate bonds.. all of boxes 1 & 11 would be moved to its own 1099-INT before declaring the "allowed" accrued interest on those bonds.

2) For purchased Treasury bonds.. all of boxes 3 & 12 would be moved to its own 1099-INT before declaring the "allowed" accrued interest on those bonds.

3) For purchased Muni bonds.. all of boxes 8, 9 & 13 would be moved to its own 1099-INT before declaring the "allowed" accrued interest on those bonds.

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4)  IF there is no accrued interest to declare,....then then all of the $$ can be on the same 1099-INT form.

[Philosopher7]

Thank you SteamTrain. I was afraid it was going to be the most complicated record keeping outcome. 🙂

Is there some place I could source that info? I couldn't find anything online.

[SteamTrain]

@Philosopher7 

Not sure...I found that reference years ago...and don't have a ref. note on that currently....digging around now I can't find it either...

But it makes sense...interest can't go negative.

[Philosopher7]

OK. Thanks for looking. I understand that interest can't go negative but I was hoping I could use some of the excess unused accrued paid interest to abate some of the $6000 in interest income from non-treasury investments in my other account and not have to keep Treasury Note specific data.

Cheers.

[JCMA25]

@SteamTrain 

What do you mean when you say "it's own 1099-Int"?  As far as I know, Vanguard, for example, sends you one and only 1 1099-INT and TT has one and only one 1099-Int section.   How does one go about entering each T-bill  as it's own 1099-Int?    I assume my Broker will put 2022's accrued interest on my 2023 1099-Int or will I have to piece this together next year by having two years of 1099-Ints to reference?

To further complicate things  I owned a Muni's  spanning two tax years.  This is my ONLY bond that paid me interest in both 2022 and 2023.  The Tax-Exempt accrued Interest does NOT appear on my 1099-INT.  I had to enter it on the "We need to adjust the taxable amount section."

Vanguard gave me three items and I'm not sure what to do with them.  The were in a section labeled not reported to the IRS - presented for your references in preparing taxes:

• Taxable Accrued Interest Paid
• Taxable Accrued Treasury Interest paid
• Tax-exempt accrued interest paid.  =  the exact amount from my Muni

[SteamTrain]

@JCMA25 

Ok...I thought I explained it all above,,,but I'll try again:

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You get a 2022 1099-INT from Vanguard with $$ in boxes 1, 3, & 8........but in (say) early 2022, you bought a Muni bond, in which you paid to the seller, the interest that accrued to that bond since it's last dividend date.

Thus, after entering, or importing, the original Vanguard 1099-INT for your 2022 taxes, you need remove any $$ in boxes 8 (&13) on that original 1099-INT (leaving all the other boxes set to whatever was in them) , and create/enter a new 1099-INT...as-if from Vanguard.  That new 1099-INT contains just the box 8 $$ (&13 $$ if any) values, and then report the accrued interest, that you paid to the seller, on the follow-up page where you adjust the interest received..

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If you do not do that, and leave all the box values in the same 1099-INT....then the accrued interest you report as having been paid to the seller, will be inappropriately apportioned proportionally among boxes 1, 3 and 8, lowering the $$ reported from boxes 1, & 3 when only the $$ in box 8 need to be reduced.

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This only needs to be done in the year in which you buy an individual bond, where you pay the seller any interest that accrued up to the date you bought the bond.

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Complications:    If you buy a bond late in the year, where you pay the seller some accrued interest....and IF the first dividend you receive from that bond doesn't occur until the next year, then you have to wait until the next year's tax preparation to report the accrued interest as having been paid to the seller.

SO....if you bought your Muni bond in late 2022, but you didn't get a dividend/interest payout from that bond until 2023, then you have to wait until your 2023 taxes (prepared in 2024) to report the accrued interest that you paid to the seller of that Muni bond.

[JCMA25]

@SteamTrain 

Thank you.  Definitely complicated. Can a T bill have accrued interest? 

So to recap.   I owned 6 bonds in 2022.  The ones paying interest are:

• T bills, bought and matured in 2022 (interest is reported perfectly on line 3 of Vang 1099-Int)
• VA Muni - Tax exempt interest is correctly reported on my Vanguard 1099-Int on line 8 (also correct are the bond prem).

The only thing reported that is not in the 1099-Int is the muni tax exempt accrued interest paid which I entered into TT DT as items reducing.   

Thanks again.  I've never owned bonds before this year. 

[JCMA25]

Further:  @SteamTrain 

Broker gives me taxable accrued interest paid.  Also they provide Taxable accrued Treasury interest paid.  

The Taxable accrued treasury interest paid is GREATER than the total (Line 3 1099-Int) Int of US Sav B & Treas.

I assume this creates a problem as TT gives an error message when the $$ reducing your interest is greater than the amount of total interest. 

[SteamTrain]

Correct...BUT...

1)  You need to see if the Treasury bond interest error still occurs if you have the box 3&12 values removed and reported in a separate 1099-INT from Vanguard...before you report the accrued interest paid to the seller in that same...separate.. 1099-INT Form.   IF that error occurs in that situation, then one or more of the Treasury bonds must have matured after 2022.  (though, I could possibly see a strange situation where premium paid (box 12) plus accrued interest reported, exceeds the box 3 value....I haven't researched what needs to be done in that situation, since I never buy a bond that matures in the same year.

2) Since you have purchased both treasury bonds, and a Muni bond in 20200, then sounds like you will need to take that one Vanguard 1099-INT, and put the box 3&12 $$ in a new 1099-INT form Vanguard, and then the box 8 & 13 values in another new 1099-INT from Vanguard.

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My brother avoids almost all these issues by only buying Bond Mutual Funds from Vanguard, where they deal with all that stuff internally, and only have to report net interest generated  (which ends up on a 1099-DIV instead).

[JCMA25]

Got it, I'm starting to see the light... you and add a 2nd 1099-Int of my own creations.  I didn't know you can do that in TT.   Essentially having a 1099-INT for each bond is the method correct?  

I cannot figure out how much of the Taxable accrued Treasury interest is from the T bills that I bought in 2022 and have already matured in 2022 vs the T bills I bought in 2022 and mature in 2023.   I reviewed the trade confirm and there is nothing there.  Interestingly the accrued interest is easy to see on regular bond trade confirms but nothing there on T bills.   I would love to figure this out so I can get it correct. 

The great thing about buying individual bonds is duration risk is eliminated.  The price does up and down but your Yield is locked in if you hold to maturity.  This accounting is a pain for sure. 

[SteamTrain]

You don't need to create a separate 1099-INT for each bond....you create one for all $$/bonds of the same type i.e. all of the $$ in box 1 (&11) can be lumped together on a single 1099-INT, or box 3(&12) or box 8(&13).

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And you don't need to do individual 1099-INT forms at all, unless you have some accrued interest to report on any of the different bond-types (boxes 1vs3vs8).

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I don't know how Vanguard reports the accrued interest paid to the seller....You might have to call a Vanguard Rep with yoru list of purchases, and have them check it out for each bond. 

(My Fidelity purchase confirmations shows the accrued interest paid out during the pruchase....right on the final confirmation form, that I download and save as a PDF ((and print out too)) a day or 2 after I execute the purchase)

[JCMA25]

@SteamTrain 

Thanks again.  I actually found what I was looking for in the Vang statements.  It was there, I just missed it (printed on the back of another page).   I'm curious though... the miscellaneous items ( accrued interest paid) which are listed below the 1099-INT.:  will this info also be included on next years Vanguard 1099-Int?   I traced the numbers to bonds I bought that have NOT paid any interest yet (ie bought in 2022, but 1st interest payment is not until 2023 so it makes sense based on our back and forth here).  

I'll be sure to check my 1099-Int carefully when it's issued for 2023, and I wonder if it will be listed there in 2023 or If I'll have to refer back to 2022's 1099-Int and do the math.

Thanks again. 

[SteamTrain]

So far, there is no place to enter the accrued interest on any of the IRS 1099-INT forms.....you actually have to track it, and enter it separately as a part of the TTX interview process.....which the software then uses and enters it appropriately as a subtraction on the Schedule B for any taxable Corporate or Treasury bonds.   So don't expect those $$ to show up in the actual 2023 1099-INT itself.   

(Note that while Corporate&Treasury bond accrued interest you paid, shows up as an entry on the Schedule B as a subtraction, the Muni accrued interest reported, just shows up on the final Federal 1040, simply as a lower $$ amount on line 2a of that form 1040)

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Vanguard might show an accrued interest line somewhere on the Supplemental Details (perhaps listed as Miscellaneous for Vanguard?) sheets at the time they issue the 1099-INT form, but those supplemental sheets are not actually sent to the IRS.    Thus...Keeping track of what can be claimed for accrued interest for any particular year, depends on you keeping accurate records of which $$ can be claimed for which years.   

I use my own spreadsheet detailing what bond I purchased, the accrued interest amount I paid out, and which tax year I can claim the accrued interest on.

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[HardRightEdge99]

Thanks @SteamTrain.  Makes sense.  I'm wondering if anybody has found a reference from the IRS or an accounting firm verifying your key points:

1) Accrued interest paid at the time of bond purchase can offset interest earned only on the same security.

2) Accrued interest paid can only offset interest earned in the year interest is earned on that same security.  In other words, if a bond was purchased in 2023 with accrued interest paid and the first interest payment on that bond is not until 2024, then the accrued interest paid can be used to offset interest received on the 2024 return, not the 2023 return.

Federal Schedule B instructions are of no help based on an "accrued" word search.