Many thanks. I was struggling with solving a related problem, and your content allowed me to see the light. In short: I had wondered why it was that although stocks fall in price by a tax-related fraction of the dividend on an ex-dividend day, bonds are modeled as falling by the _full_ coupon value. Now I can see why! I am very happy with your content (and also with your narration), which was exactly what I needed. Keep up the good work!
This is very helpful. Lots of advice out there on how to buy, sell, choose best bond product for your needs, but not much info on calculating tax obligation. Because I'm a small investor, I'm going to keep my bonds in my IRA, and use something else for my after-tax account (small now, but expected to grow in coming years with RMDs).
If i buy a corporate bond in december and paid accrued interest, but the coupon interest is paid in january, which year can i deduct the accrued interest paid on schedule B?
See if this helps: www.treasurydirect.gov/forms/sec0011.pdf www.irs.gov/forms-pubs/about-form-1099-b www.treasurydirect.gov/indiv/help/treasurydirect-help/user-guide/261-270/
Thanks for posting this video. I find it very useful specially when there is no much information on internet around bond taxation and also many so called tax professionals are not much educated on this. I have a query - If I bought a bond with lets say $200 accrued interest and sold it with $500 accrued interest, what should be reported be my taxable interest $300 ($500-$200) or $500 (accrued interest on sale) assuming no other interest payment during the holding period of the bond?
For Buyer 1st Year Taxable Interest = Coupon Payments - Accrued Interest Adjusted Basis = Purchase Price + Purchase Expenses - Accrued Interest For Seller Capital Gain or Loss = Sale Price - Sale Expenses - Accrued Interest on Sale - Adjusted Basis Taxable Interest = Interest Paid + Accrued Interest
@@WCSMoneyTutorials thanks. If I could re-write them to simplify in layman terms: Interest income = Accrued Interest on Sale date - Accrued Interest on Purchase date + Any Interest paid during holding period Capital Gain/loss = Adjusted Sale price (subtracted with accrued interest on sale date) - Adjusted Purchase price (subtracted with accrued interest on purchase date) Assuming no additional expenses to Sale/Purchase
The problem with your calculation of interest income is that this is not how it is done on the tax form. When you buy the bond, you subtract the accrued interest from your total interest for that year and your basis in the bond equals the purchase price minus the accrued interest. In other words, you will have to list the full amount of the interest when you file your taxes, because that is what you will be receiving, then you subtract the accrued interest from that total interest on Schedule B, as I show in the video. When you sell the bond, you must pay ordinary tax on the accrued interest you received from the sale, then the sale price is adjusted by subtracting the accrued interest, and then any capital gain is calculated by subtracting the adjusted purchase price from the adjusted sale price. This also assumes that you did not buy the bond at a discount. If you purchased the bond at a discount, then there will be OID income that will be taxed as interest. OID income is treated like accrued interest. It must be subtracted along with accrued interest from the sales proceeds before you can determine your capital gain or loss.
Excellent content! Thanks so much for doing this for such a complex topic. Question: I believe you said that the election to amortize bond premium annually needs to be elected and cannot be revoked without consent from the IRS. Since you mentioned that the premium on tax exempt bonds MUST be amortized annually for the correct calculation of MAGI (for example used for ACA healthcare subsidy determination), does this mean that you MUST elect the annual amortization method for all your other taxable bonds in order to comply with how tax-exempt bond premium must be amortized ? or is it that the election for taxable bonds is not required in order to amortize the premium for the tax-exempt bonds?
Consult your tax advisor to verify, but the election applies only to taxable bonds. There is no election for tax-free bonds since you must amortize. www.irs.gov/publications/p550#en_US_2022_publink100010251 How To Report Amortization (Taxable Bonds) Subtract the bond premium amortization from your interest income from these bonds. Report the bond's interest on Schedule B (Form 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter the amortizable bond premium allocable to the interest payments for the year and label this amount “ABP Adjustment.” Subtract this amount from the subtotal, and enter the result on line 2. Bond premium amortization more than interest. If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can include the difference in Other Itemized Deductions on Schedule A (Form 1040), line 16. But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Pre-1998 election to amortize bond premium. Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Bonds acquired before October 23, 1986. The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Bonds acquired after October 22, 1986, but before 1988. The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond.
Does the broker report anywhere in the 1099-INT the accrued interest you paid at purchase so that you know to deduct it from the coupon interest you received that year? I didn’t see a box for it, and my broker only reported it as supplemental information (not reported to the IRS) on the year I purchased the bond even if the first coupon was only paid the year after....
@@WCSMoneyTutorials Thank you. If the accrued interest I paid at purchase was for a tax-exempt (municipal) bond, how would I deduct it from the coupon, since interest on municipal bonds is not reportable on Schedule B? I know the interest is not taxable anyway, but reporting the full tax-exempt coupon on my 1040 without deducting the accrued interest would increase the MAGI for ACA subsidies.
Good question, but I could not find a clear answer. You should CONSULT A TAX PROFESSIONAL for the answer, but I BELIEVE that you just list the net tax-free interest on Line 2a, Form 1040. I say this because this is how you subtract the premium paid for a bond. You also don't report the interest if it was earned in a tax-advantaged retirement account. Since you did not earn the accrued interest, you should not have to report it, especially since the IRS does not give you a specific way to subtract it, as far as I know. But do consult a TAX PROFESSIONAL to be sure. Here are the instructions for Line 2a from www.irs.gov/instructions/i1040gi: Line 2a Tax-Exempt Interest If you received any tax-exempt interest (including any tax-exempt original issue discount (OID)), such as from municipal bonds, each payer should send you a Form 1099-INT or a Form 1099-OID. In general, your tax-exempt stated interest should be shown in box 8 of Form 1099-INT or, for a tax-exempt OID bond, in box 2 of Form 1099-OID, and your tax-exempt OID should be shown in box 11 of Form 1099-OID. Enter the total on line 2a. However, if you acquired a tax-exempt bond at a premium, only report the net amount of tax-exempt interest on line 2a (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year). Also, if you acquired a tax-exempt OID bond at an acquisition premium, only report the net amount of tax-exempt OID on line 2a (that is, the excess of tax-exempt OID for the year over the amortized acquisition premium for the year). See Pub. 550 for more information about OID, bond premium, and acquisition premium. Also include on line 2a any exempt-interest dividends from a mutual fund or other regulated investment company. This amount should be shown in box 12 of Form 1099-DIV. Don’t include interest earned on your IRA, health savings account, Archer or Medicare Advantage MSA, or Coverdell education savings account.
@@WCSMoneyTutorials Thanks again. To close the loop, I was indeed advised to just reduce the tax-exempt interest received by the amount of the accrued interest I paid at purchase, which was reported by my broker only as supplemental information on the year of purchase and not on the year of sale/redemption. A WORD OF CAUTION FOR EVERYONE: Brokers like Fidelity do not report bond premium paid at purchase and capital gain/loss on short-term fixed income securities such as bonds and CDs with 1 year maturity or less. Therefore, it is up to you to keep track of it and report it. Otherwise, the broker will only report the total coupon interest paid and you could end up paying more taxes than you should, or report a higher MAGI that could result in losing certain credits.
Consider having someone else read your script - or, work on your own delivery. As it is, irrespective of its content, your work just isn't successful. Thanks.
@@WCSMoneyTutorials, I should clarify my meaning: I feel that the video is unsuccessful insofar as its narration comes across as listless and monotonous, which subtracts from the goal of capturing the attention of the audience.
I was thinking about that. Thank you very much for your feedback. I greatly appreciate it. You're right. I should rehearse it more. If you have any other suggestions, please let me know. I really want to improve.
Many thanks. I was struggling with solving a related problem, and your content allowed me to see the light.
In short: I had wondered why it was that although stocks fall in price by a tax-related fraction of the dividend on an ex-dividend day, bonds are modeled as falling by the _full_ coupon value. Now I can see why! I am very happy with your content (and also with your narration), which was exactly what I needed. Keep up the good work!
Thank you for your appreciation. It helps to keep me going.
This is very helpful. Lots of advice out there on how to buy, sell, choose best bond product for your needs, but not much info on calculating tax obligation. Because I'm a small investor, I'm going to keep my bonds in my IRA, and use something else for my after-tax account (small now, but expected to grow in coming years with RMDs).
Glad it was helpful!
If i buy a corporate bond in december and paid accrued interest, but the coupon interest is paid in january, which year can i deduct the accrued interest paid on schedule B?
You deduct it in the year of your first interest payment.
Thanks for this video! Could you please make video how to read 1099-INT and 1099B for government bonds/treasuries?
See if this helps: www.treasurydirect.gov/forms/sec0011.pdf
www.irs.gov/forms-pubs/about-form-1099-b
www.treasurydirect.gov/indiv/help/treasurydirect-help/user-guide/261-270/
Thanks for posting this video. I find it very useful specially when there is no much information on internet around bond taxation and also many so called tax professionals are not much educated on this. I have a query - If I bought a bond with lets say $200 accrued interest and sold it with $500 accrued interest, what should be reported be my taxable interest $300 ($500-$200) or $500 (accrued interest on sale) assuming no other interest payment during the holding period of the bond?
For Buyer
1st Year Taxable Interest = Coupon Payments - Accrued Interest
Adjusted Basis = Purchase Price + Purchase Expenses - Accrued Interest
For Seller
Capital Gain or Loss = Sale Price - Sale Expenses - Accrued Interest on Sale - Adjusted Basis
Taxable Interest = Interest Paid + Accrued Interest
@@WCSMoneyTutorials thanks. If I could re-write them to simplify in layman terms:
Interest income = Accrued Interest on Sale date - Accrued Interest on Purchase date + Any Interest paid during holding period
Capital Gain/loss = Adjusted Sale price (subtracted with accrued interest on sale date) - Adjusted Purchase price (subtracted with accrued interest on purchase date)
Assuming no additional expenses to Sale/Purchase
The problem with your calculation of interest income is that this is not how it is done on the tax form.
When you buy the bond, you subtract the accrued interest from your total interest for that year and your basis in the bond equals the purchase price minus the accrued interest. In other words, you will have to list the full amount of the interest when you file your taxes, because that is what you will be receiving, then you subtract the accrued interest from that total interest on Schedule B, as I show in the video.
When you sell the bond, you must pay ordinary tax on the accrued interest you received from the sale, then the sale price is adjusted by subtracting the accrued interest, and then any capital gain is calculated by subtracting the adjusted purchase price from the adjusted sale price.
This also assumes that you did not buy the bond at a discount. If you purchased the bond at a discount, then there will be OID income that will be taxed as interest.
OID income is treated like accrued interest. It must be subtracted along with accrued interest from the sales proceeds before you can determine your capital gain or loss.
@@WCSMoneyTutorials thanks, how could I reach to you to get help on my finance?
Sorry, I don't have the time.
Excellent content! Thanks so much for doing this for such a complex topic. Question: I believe you said that the election to amortize bond premium annually needs to be elected and cannot be revoked without consent from the IRS. Since you mentioned that the premium on tax exempt bonds MUST be amortized annually for the correct calculation of MAGI (for example used for ACA healthcare subsidy determination), does this mean that you MUST elect the annual amortization method for all your other taxable bonds in order to comply with how tax-exempt bond premium must be amortized ? or is it that the election for taxable bonds is not required in order to amortize the premium for the tax-exempt bonds?
Consult your tax advisor to verify, but the election applies only to taxable bonds. There is no election for tax-free bonds since you must amortize.
www.irs.gov/publications/p550#en_US_2022_publink100010251
How To Report Amortization (Taxable Bonds)
Subtract the bond premium amortization from your interest income from these bonds.
Report the bond's interest on Schedule B (Form 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter the amortizable bond premium allocable to the interest payments for the year and label this amount “ABP Adjustment.” Subtract this amount from the subtotal, and enter the result on line 2.
Bond premium amortization more than interest. If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can include the difference in Other Itemized Deductions on Schedule A (Form 1040), line 16.
But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Any amount you cannot deduct because of this limit can be carried forward to the next accrual period.
Pre-1998 election to amortize bond premium. Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988.
Bonds acquired before October 23, 1986. The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit.
Bonds acquired after October 22, 1986, but before 1988. The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond.
Does the broker report anywhere in the 1099-INT the accrued interest you paid at purchase so that you know to deduct it from the coupon interest you received that year?
I didn’t see a box for it, and my broker only reported it as supplemental information (not reported to the IRS) on the year I purchased the bond even if the first coupon was only paid the year after....
Accrued interest isn't reported on Form 1099. Use the figures from your broker on Sch B, as I explain in the video.
@@WCSMoneyTutorials Thank you. If the accrued interest I paid at purchase was for a tax-exempt (municipal) bond, how would I deduct it from the coupon, since interest on municipal bonds is not reportable on Schedule B?
I know the interest is not taxable anyway, but reporting the full tax-exempt coupon on my 1040 without deducting the accrued interest would increase the MAGI for ACA subsidies.
Good question, but I could not find a clear answer. You should CONSULT A TAX PROFESSIONAL for the answer, but I BELIEVE that you just list the net tax-free interest on Line 2a, Form 1040. I say this because this is how you subtract the premium paid for a bond. You also don't report the interest if it was earned in a tax-advantaged retirement account. Since you did not earn the accrued interest, you should not have to report it, especially since the IRS does not give you a specific way to subtract it, as far as I know. But do consult a TAX PROFESSIONAL to be sure.
Here are the instructions for Line 2a from www.irs.gov/instructions/i1040gi:
Line 2a
Tax-Exempt Interest
If you received any tax-exempt interest (including any tax-exempt original issue discount (OID)), such as from municipal bonds, each payer should send you a Form 1099-INT or a Form 1099-OID. In general, your tax-exempt stated interest should be shown in box 8 of Form 1099-INT or, for a tax-exempt OID bond, in box 2 of Form 1099-OID, and your tax-exempt OID should be shown in box 11 of Form 1099-OID. Enter the total on line 2a. However, if you acquired a tax-exempt bond at a premium, only report the net amount of tax-exempt interest on line 2a (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year). Also, if you acquired a tax-exempt OID bond at an acquisition premium, only report the net amount of tax-exempt OID on line 2a (that is, the excess of tax-exempt OID for the year over the amortized acquisition premium for the year). See Pub. 550 for more information about OID, bond premium, and acquisition premium.
Also include on line 2a any exempt-interest dividends from a mutual fund or other regulated investment company. This amount should be shown in box 12 of Form 1099-DIV.
Don’t include interest earned on your IRA, health savings account, Archer or Medicare Advantage MSA, or Coverdell education savings account.
Thanks again for the prompt and comprehensive response!
@@WCSMoneyTutorials Thanks again. To close the loop, I was indeed advised to just reduce the tax-exempt interest received by the amount of the accrued interest I paid at purchase, which was reported by my broker only as supplemental information on the year of purchase and not on the year of sale/redemption.
A WORD OF CAUTION FOR EVERYONE: Brokers like Fidelity do not report bond premium paid at purchase and capital gain/loss on short-term fixed income securities such as bonds and CDs with 1 year maturity or less. Therefore, it is up to you to keep track of it and report it. Otherwise, the broker will only report the total coupon interest paid and you could end up paying more taxes than you should, or report a higher MAGI that could result in losing certain credits.
What type of bond is a marriage certificate? Does the divorce create another bond? Who buys those?
???
Consider having someone else read your script - or, work on your own delivery. As it is, irrespective of its content, your work just isn't successful.
Thanks.
Why do you think it is not successful?
@@WCSMoneyTutorials, I should clarify my meaning: I feel that the video is unsuccessful insofar as its narration comes across as listless and monotonous, which subtracts from the goal of capturing the attention of the audience.
I was thinking about that. Thank you very much for your feedback. I greatly appreciate it. You're right. I should rehearse it more. If you have any other suggestions, please let me know. I really want to improve.
@@WCSMoneyTutorials, no problem. Thank you for sharing your time and work with people.