Zero coupon municipal bonds maturation

[ScruffyCurmudgeon]

@msdalt01 you wrote:

"The bond was slightly more than three years old when purchased and, in 1994, reporting requirements for the brokerage were not as comprehensive as they are today.  I don't think that the imputed interest was reported for the first two decades or so.

Should I adjust the cost basis to include all imputed interest, meaning that the basis = the redemption price, considering that this is a Municipal bond and there should not be tax associated with the growth of my investment due to tax free interest?"

Yes, possibly with the help of the bond issuer or its custodian, for your own benefit so as to reduce the cost basis to eliminate the apparent but illusionary gain (which would be taxable even though the bond is tax-exempt), you must produce the updated cost basis by calculation of the imputed interest that was allocated over the years from when you purchased the bond, given that your purchase cost established your initial cost basis before you began receiving the benefit of the unpaid but imputed interest.

[rmittal01]

Dear Scruffy

I have a similar question

I bought a 20 year, $20,000 US treasury STRIP Zero coupon bond for $6199 in 1998 which matured in 2018.

My 2018 1099-B shows proceeds of $20K but no other information about cost basis etc.

I have paid the taxes on the OID reported interest on this each year.

Given that, can I just make the cost basis equal to the proceeds (i.e. $20K) when I fill out form 8949 in my tax return since I should not really owe any additional taxes?

Thanks much

[Critter]

Correct ... since the broker did not list the basis it is your responsibility to do so. 

[jhrob]

I get the accrued interest is reportable yearly on a federally tax free, state not tax free coupon bond. I will do this for this tax year.

What I cannot  figure out is whether  and where the OID of $300 (which increases a bit each year) which is reported yearly (informally since this is a non covered bond) and is presumably state taxed yearly or whether I can wait until maturity to see  its penalty tax wise.  There are no boxes on this non covered bond.  I would really prefer to wait until maturity for the tax penalty.  The important point here is that this is a non-covered bond so there are no boxes. I have have not paid anything previously .

[ScruffyCurmudgeon]

Please clarify - is this a taxable or tax-exempt fixed income security?

Is the Form 1099-OID reporting in Box 1 OID or is it reporting in other boxes either an acquisition or market premium or a market discount for taxable security, v. OID for tax-exempt?

[jhrob]

These are non covered bonds.

This is a Tax-Exempt OID Bond from California acquired 2014 and maturity date 2017. Every year I get a tax exempt obligation of around 350 (it increases each year) and a market discount accretion of around 30. I want to know whether this $350 must be paid every year? Or do I have the option of waiting until the end? It does not effect my federal taxes (1040) but does effect my state taxes (140) since this bond is non-resident.

I presume I should report the market discount accretion in the OID Box. 4. So do I report the OID discount in the Box 11? The brokerage company does not tell me what box and it is not reported on form 1099. I believe it has something to do with it being a non covered bond. However the reckoning will come what it matures (since the IRS appears to know everything).

It is a minor matter in the scheme of things but I would like to get it right.

Thanks for your patience.

[Nan2C]

I have a similar situation.  

Has anyone nailed the correct precise answer on this?

My understanding  is Bonds started to be covered in 2014.

I have a Muni Bond that is tax exempt.  

Purchased in 3/6/2014.  Says "SER 2012" I imagine that means it was issued in 2/14/2012. I paid the full price of the bond + accrued interest of $111.11 and a minimal processing fee.

"DUE 2036"

It was Called 12/1/2021.

On IRS.gov website regarding the information on bonds, it sounds as though there is a choice between paying tax on the "interest" yearly or at the time the bond is cashed out.  

If the yearly option is chosen, the IRS has to approve using method of paying tax at the end of the life of holding the bond. WHEW! 

I can not tell which method was used.  (I have another bond whose taxable interest is listed every year)

Looking back through tax returns H&R Block from 2014 forward, the interest has been entered in the Tax Exempt box, less ? it looks like ? Bond Premium which was listed on line 11. 

On years when Bond premium was listed on line 13, the amount wasn't deducted.(sometimes)

I haven't received the tax form yet for 2021.  

Since there seems to be a choice of when to report ?? and pay tax on the interest on Bonds, and if the amount reported on the form is the entire amount of interest over the time I have held the bond (as I think it has been covered the entire time) and then... how capital gains or losses play into it... 

I am attempting to understand it before the form gets here!

The bond that was called was Tax Exempt, however, I do have one that is Not tax exempt and want to understand the implications and details of tax reporting while holding bonds.

I have read the IRS info, but find it unclear.  When they are talking about yearly or at maturity - does that apply to both tax exempt and corporate bonds?

I would like to avoid paying double tax!  & am attempting to understand all the brackets that affect taxation so as not to be bumped unnecessarily into a higher bracket after retirement.

[Mike9241]

I have a Muni Bond that is tax exempt. 

if you bought the muni bond at a premium amortization of the premium is required over the life of the bond so that at maturity your adjusted cost basis and redemption price are equal. muni bond premium amorization is on line 13.of the 1099-int.  since the bond was called before maturity there may still be unamortized bond premium.

the broker apparently did the amort for you and reported it on the annual 1099 consolidate report (that's how the amount got on line 13. it would only be subtracted from line 8 and the net reported in box 2a on the 1040. the 1099-B will might report the correct sales price and adjusted cost (cost less amortization of premium). it's just that the cost will not be reported to the IRS.

line 11 is for taxable bond premium amortization

for long-term taxable bonds (other than US Savings Bonds) I believe OID reporting was required since the 1980's

to read up more on his subject see IRS 1212

https://www.irs.gov/pub/irs-pdf/p1212.pdf 

the option to report interest yearly or at maturity applies to US Savings bonds. 

Reporting the interest all at once at the end
When electronic EE Bonds in a TreasuryDirect account stop earning interest, they are automatically cashed and the interest earned is reported to the IRS.

You can see the interest on your IRS Form 1099-INT.

If a financial institution pays the bond, you will receive a paper 1099-INT from that financial institution either soon after you cash your bonds or within the first two months after the end of the year in which you cash your bonds.
If you cash electronic bonds in your TreasuryDirect account, your 1099-INT will be available early the next year in your account. (Video)
Reporting the interest every year
You may, however, choose to report the interest every year.

You may, for example, find it advantageous to report interest every year 

Note: You do not actually receive the interest every year even if you report it that way. The interest that the bond earns is reported on a 1099-INT after the bond is cashed or is reissued to reflect a taxable change in ownership. The 1099-INT will show all the interest the bond has earned over the years. Go to IRS Publication 550, Investment Income and Expenses, for instructions on how to tell the IRS that you already reported some or all of that interest in earlier years.

Once you start to report the interest every year you must continue to do so every year after that. for all your savings bonds and any you acquire in the future.

[RobertB4444]

When you receive your 1099-B it will show the redemption of the bond with the amount that you were paid when the bond was called as the sales price. 

The only thing that you will have to pay tax on is the profit earned on that bond redemption so in the next box should be the basis, or the amount you paid for the bond.  In this case, the amount that you paid for the bond is the amount that you originally forked over plus all of the "non-taxable interest" that the bond earned while you held it.  

If the sales price is larger than the basis then you have a capital gain.  You'll pay tax on that.

If the sales price is smaller than the cost basis you have a capital loss.  You get to deduct at least some of that on your tax return.

[Nan2C]

Thank you for the details, and the IRS link! I missed that publication.

I will read up!  It is becoming clearer. 

thanks for your swift and detailed reply.  If I can find you again, I will follow up when the form comes and I make more progress.