Treasury TIPS - how to make OID and bond premium work right

[jdnaylor]

I have income from several Treasury Inflation Protected Securities.  All purchased at a bond premium.  All with very low coupons.  So my 1099INT Line 3 interest is much less than my Line 11 bond premium.  However the OID (inflation portion) is much larger than the bond premium.  Will TurboTax allow the bond premium deduction in full?  Lets do an example.  Say the Line 3 Interest is $1000, the Line 11 bond premium is $5000 and the OID is $10,000.  How can I plug this into TurboTax to have the interest net out to +$1000-$5000+$10000 = $6000 which should be the federal taxable amount?  Also will the net interest carry over to state taxes so nothing will show up as taxable there?

[jdnaylor]

Whoops, meant Line 12 bond premium, not Line 11

[DaveF1006]

To clarify, did you receive a 1099 INT, 1099 OID or both? if both, did the bond premium appear on the 1099 INT or 1099 OID?

Also are you looking at a consolidated 1099 that reports all of these in their separate sections?

[jdnaylor]

I get a combined statement from my broker with both a1099INT and a 1099OID.  The broker reports the coupon interest and amortized bond premium on 1099INT, and the inflation portion of the TIP as OID on 1099OID, with no bond premium shown there.  Input in this way on TurboTax gets a ding from the program asserting bond premium is larger than Line 3 interest in SmartCheck.  So I tried putting the bond premium on the appropriate line on the 1099OID instead, still get the same ding.  However, if I zero out the bond premium on both forms and instead list it as acquisition premium on the OID it seems to work.  Give the same result on Schedule B with the correct interest totals and an ABP deduction.  My point is that I understand how the IRS may say you can't deduct a bond premium greater than interest earned on a normal bond, with a TIP the bond premium will almost always be much larger than the coupon, which is often only .125%.  The real interest is the OID.  TurboTax should allow the bond premium deduction as long as it is less then THE SUM OF interest plus OID. This would conform to IRS Bulletin 2013-12 Section 1.1275-7, which shows an example calculation.

[DaveF1006]

You are going to need to adjust the bond premium in your return because you will not be able to deduct the entire premium. You need to amortize it over a period of time. The amortization is calculated by:

1. First, calculate the bond premium by subtracting the face value of the bond from what you paid for it. 
2. Then, figure out how many months are left before the bond matures and divide the bond premium by the number of months remaining. That tells you how much to amortize on a monthly basis.
3. You may need to have a spreadsheet to do this until the amortization period is complete. Now once you determine how amortization the bond premium incurred you will report in the following manner:
4. Select Federal Taxes
5. Under Wages & Income select Interest on 1099-INT
6. Enter your 1099-INT information, select Continue
7. Select I need to adjust the taxable amount, select Continue
8. Enter the state that pays your tax-exempt interest, select Continue
9. Enter the amount of your premium adjustment (use a negative number if you need to add to the interest reported)
10. Select the Reason for Adjustment
11. Keep this out of OID.

Please read this excellent Turbo Tax post for more a more detailed analysis on this. Especially read the paragraph where it addresses how to report in case if your bond amortization for this year is higher than the interest paid.  Fascinating stuff.

@jdnaylor 

[stop40]

Your response is for municipal bonds but the question was about US Treasury TIPS!