Include "accured interest" in Bond cost basis?

[AZ-Tax]

I thought I saw a post of this not to long ago and I search under "accrued, accrued interest, bond accrued interest" and came up with nothing.

If my memory serves me well, the accrued interest paid when purchasing the bond is to be included in the cost basis of the bond. Any interest payments made to the owner after purchase would be reported on Sch B.

Does that sound correct? Also, the Brokerage 1099-Div, 1099-Int & 1099-B combo report would not report the accrued interest under the 1099-int, correct?

3/23/2011 update: I found this on the following website. http://www.webtaxcenter.com/invest.jsp

12: If you buy a bond in between the interest dates, the accrued interest from before you buy the bond will be included in your 1099-INT as taxable income. You can deduct the accrued interest from the 1099-INT amount on your tax return. If you have over $1,500 in interest income and need to file Schedule B, you would have one line that reports the full amount of the 1099-INT then the next line you would write down Accrued Interest and enter the amount of accrued interest as a negative to reduce the taxable amount of interest income. For example, you buy a company's bond that pays out interest once a year on January 1st. If you buy the bond in the middle of the year on July 1st and the company pays you $1,000 in interest on January 1st, you will receive a 1099-INT from the company for a full $1,000. Since you only owned the bond for half the time period the interest was accruing, only $500 of the bond interest would be taxable income on your tax return.

What if the TP is new client and the bond was purchased in a tax year for which the amending window closed. Cannot add accrued to cost basis on Sch D for capital gains is taxed at a different rate then interest. So can you deduct the accrued interest paid w/Bond in 2005 on TP's 2010 tax return? Assume you could, what if there is not enough current interest to offset accrued interest deduction? No carry forward for negative interest, correct?

[Gary2]

It's discussed in Pub. 550, and is fairly straightforward.

The accrued interest when buying is part of the basis. When the new owner receives the first interest payment, that portion of the interest is a return of capital that lowers the basis. If you think about it, it all makes sense.

I wouldn't expect to see that info on the 1099-INT. You'd have to calculate it, and then take it as a Schedule B adjustment (similar to nominee interest).

[JON]

Accrued interest

purchased should be offset to the first interest payment received.

[AZ-Tax]

Is this discussed in the TTB and if so what pages?

Is this discussed in the TTB and if so what pages?

[Davc]

Agree with Jon.

[AZ-Tax]

Accrued should offset 1st 1099-INT interest payment.

purchased should be offset to the first interest payment received.

This brings up a question. Hypo: you get a new client who bought the bonds in 2005 and NO accrued interest was reported to offset 1099-INT interest from the bonds on TP's 2005 tax return. Also, there is not enough overal 1099-INT for 2010 tax year to offset the accrued interest and there is no such thing as net NEGATIVE 1099-INT interest and NO carryforward of negative 1099-INT. Is the TP just out from deducting accrued interest?

Hopefully I said this correctly

[Edsel]

Nonsequitur

If there was accrued interest in 2005, surely it would have been paid by now, and that would be in the province of the preparer for 2005 or 2006. It is a dead issue, unless you want to find a way to get around the statutory limit and do an amended return for those years.

The only thing which may remain from a purchase price differential might be original issue discount. That amortizes every year and is reportable as interest income. The agent usually calculates this amortization on a compounded basis and issues a 1099-OID for the amount amortized in a given year.

This is a separate issue from accrued interest. The OID is a measure of moving the purchase price of the bonds closer to the redemption price over the life of the bond.

[FEDUKE404]

More on interim interest

I must have slept through that tax class.

I always thought that bond interest "charges" were basically an offset (in some way) to the interest the underlying bond was paying due to a purchase/sale event that occurred midway through the bond's interest payment cycle.

If you buy a bond on March 1st, and it pays quarterly interest, the new owner will receive 100% of the interest for that quarter but will be taxed on less (via Schedule B adjustment) since he likely "paid" the prior owner the interest for Jan and Feb at the time of purchase. A similar arrangement would occur for someone who sells a bond on March 1st (and gets no quarterly interest) but would receive some interim interest for his Jan/Feb ownership.

The concept is not unlike what is done with annual property taxes on a HUD-1 statement.

It should be noted that OID is a completely separate matter, and bonds which are bought/sold at either a premium or at a discount are also treated differently....definitely a cost basis issue there!

FE

[AZ-Tax]

Is this covered in the TTB?

Does anyone know if this is covered in the TTB and if so what pages?