How do I record Tax Exempt Municipal accrued interest EARNED

and do I make any distinction depending on if I have tax exempt interest income on that same municipal security?
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    I'm not sure I understand the question so I'm hazarding a guess at what you need.

    When you buy a bond, muni or otherwise, you typically pay the seller for interest accrued from the last payment date to the date of sale.  This accrued interest is an asset to you, not part of the bond's basis or an expense.

    When the next interest pay date comes around and you receive the period's interest part of that payment serves to reduce your accrued interest asset to $0 and the remainder is considered income to you.

    From the standpoint of recording this in Turbo Tax you enter the 1099-INT you receive (which is for the full period's interest) and then on the next page of the Turbo Tax interview you select the box "I need to adjust the amount."   You then enter the accrued interest as a positive amount in the "Adjustment" box and click the radio button "My accrued interest is included in this Form 1099-INT."

    If your 1099-INT includes amounts paid on more than one bond you still start with the 1099-INT amount and deduct your accrued interest, as above.

    Tom Young
    • Tom, thx.  That makes sense -- for accrued interest PAID and I' ve done that (the adjustment);  but what about section of 1099-INT that is for accrued interest EARNED.  Does that require any diff treatment than any other Tax Exempt Interest Earned (i.e. "Tax Exempt Accrued Interest Earned" is merely a subset of Tax Exempt Interest" income)?  Thx
    • You're coming at this from the standpoint of the SELLER of the bond, not the buyer?

      I'll admit I've never sold a bond, only bought them, so I'm not sure from a tax standpoint exactly how that interest paid by the buyer to the seller is reported.  I've bought bonds and every 1099-INT I've received has been "gross" and I've had to net that number out for the accrued interest I paid.

      I actually thought the accrued interest paid to the seller might show up as part of the proceeds of sale on a 1099-B, but then I went and read the instructions: for Box 2: "Do not include any accrued interest on bonds sold between payment dates (or on a payment date) in this box.  Instead, report, this accrued interest on Form 1099-INT."

      So it sound like you, as the seller, get a 1099-INT that contains the accrued interest paid to you?  If that's the case, then no adjustment is needed.  You earned the interest from the last payment date to the date of sale, that interest was paid to you by the buyer, and the broker reports this amount to you on a 1099-INT.

      The situation isn't symmetrical between buyer and seller - the buyer has to make an adjustment to his 1099-INT while the seller doesn't - but I guess symmetry isn't necessary here.

      Tom Young

      UPDATE:

      I actually tried to enter a bond sale in Turbo Tax and the interview form has a box for accrued interest so maybe it does get reported on the 1099-B (or with information provided with the 1099-B) in many cases.  Doesn't change my answer about how you "just enter it" I just didn't expect to see it there.
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