Edward Jones 1099B

[dktax]

I am confused about the tax treatment of the redemption of a bond. There is an adjustment amount of $350 with code D. From reading I understand this is market discount. The 1099 shows proceeds and basis but I am unsure what to do with the adjustment. Could someone point me in the right direction?

[taxea]

regs on investments.

[dktax]

Yes, I've been reading the regs but that is why I am confused. Is there more information that is not included on the 1099? What should I ask for?

[FEDUKE404]

Possibility

Sounds as if the adjustment is an interim interest issue (bonds bought/sold during interest payment period), which should float over to Schedule B.

If not, then client would need to provide you with more information.

FE

[Roland Slugg]

Sounds as if the adjustment is an interim interest issue (bonds bought/sold during interest payment period), which should float over to Schedule B.

No, that is not what it is. Interest paid or received when a bond is bought or sold is never reported as part of basis on form 1099-B.

When a bond is purchased on the secondary market, at a discount, the spread between its face/par value and its purchase price is called "market discount." (There can also be market premium, if someone buys a bond for more than its par value, and this is common right now.) The accrued interest portion of that discount can all be reported as interest income when the bond is sold, or it can be reported each year as the "accreted" market discount accrues. To do that the owner must make an election, in which case each year's accrued/accreted interest is reported as income and is also added to the basis of the bond. (Code §1278(b))

This is not a new provision or rule in the tax laws, but it is now becoming familiar to more investors. That's because the basis tracking requirements imposed on all brokers by the IRS was extended to include market discount on bonds acquired on or after January 1, 2014. Therefore, your client must have done one of the following: (A) Purchased the bond in 2014 an opted to have the broker to include the accreted market discount in income, or (B) purchased the bond prior to 2014 an advised the broker to include the accreted market discount in income. Taxpayers have a choice of reporting the accrued/accreted interest on an annual basis, by making the election referred to above, or not reporting it until the bond is sold or redeemed. If a bond holding is partially called/redeemed early, a pro-rata allocation must be made. (Code §1276(a)(3)(A) and (B))

If an investor elects to report each year's accrued/accreted interest currently, he may choose to compute that interest in one of two slightly different methods ... a "ratable accrual" method or a "constant interest rate" method. (Code §1276(b)) Most brokers (perhaps all) have certain default assumptions they will make and apply to bonds in a customer's account unless the customer advises the broker to use different options. Investors who own bonds would be wise to review these options and advise their brokers of their choices. My own broker has a form for that, as all other large brokers do, I'm sure.

[dktax]

Thank you.

Your explanation helps a great deal. I will speak to the broker.

[Jiggers]

Check out the TaxBook, page 6-4 "Amortizable Bond Premium."

[FEDUKE404]

Information from Edward Jones statement

Good grief! I just received one of those Edward Jones statements today. Client's investment portfolio consists of mostly bonds.

To directly answer your question, code "D" apparently refers to the DEFAULT election for bond income discount issues. (Refer to the Election Method box near "summary" for details.)

Tax document I have shows an entry "Bond Premium Amortization - Interest Bonds" (taxable obligations) with note of "Reference J." Client's "J" total is in the range of $250 with eight separate entries (for specific bonds) shown to reach that total. The client had roughly double that number of reported bond sales in 2014, and those have been entered on Schedule D. Above that entry is the following: "This report provides tax information (market discount accretion, bond premium amortization and acquisition premium amortization) related to fixed-income investments you held during the tax year that may impact your federal and/or state income tax returns. Certain tax information related to covered fixed-income holdings included in this report is included on Forms 1099-INT, 1099-OID, and 1099-B and is furnished to the IRS. Please consult. . ."

However, the additional information for Bond Premium Amortization states the following: "The default method is to amortize bond premium on covered taxable and tax-exempt bonds using the constant yield method. Under the default method, bond premium amortization reduces the cost basis of the bond and is reported to the IRS by Edward Jones on the Form 1099-INT. . . .The elected method is to not amortize bond premium on covered taxable bonds. If so elected, bond premium on covered taxable bonds is not amortized by Edward Joners and the cost basis is not reduced. This election to not amortize bond premium does not apply to covered tax-exempt bonds."

There is only a single entry (the interest income in Box 1) on client's Form 1099-INT.

I'm going to move on to other things to let my head clear. Roland Slugg is obviously on the right track here. Perhaps he can offer some advice as to how I should handle this specific client. (I'm quite sure client will have NO idea which option was elected. . .) It looks as if I might need to put some "adjustments" in the Sch D numbers? ? ? Or, are they already there? ? ? The code "J" total for "Bond Premium Amortization - Interest Bonds" cited above is included in an area "Summary of YTD Non-Covered Fixed Income Amounts NOT Reported on Form 1099." Looking more like a few Form 8949 adjustments loom. . .

FWIW: While I applaud Edward Jones for their attention to reporting details, they are dangerously close to providing tax information/guidelines/whatever that the average Joe cannot possibly understand. . .

FE

[dktax]

It's worth a lot

Thank you all. I no longer feel quite so stupid!

[nwtaxlady]

Similar...but with LPL Financial

I am confused also. On this LPL Financial statement under the "Details for Interest Income" has listed:

Total Interest Income 5406.36
Total Bond Prem noncovered: -1100.19
Total Accrued Int. paid: -863.89
Total Bond Prem covered: -796.75


I know what to do with the Accrued Interest Paid.

What do you do with the Bond Prem noncovered and Bond Prem covered Amounts?

Thanks...I am confused too!

[nwtaxlady]

Also.....let me add....

The information I gave you was in the "Detail for interest Income"

On the 1099-Interest has interest income for Box 1.
and ALSO has in Box 11. Bond Premium of $796.75 which is for the Covered lots.

So what do we do with this information?

[FEDUKE404]

Answer found. . .I think

From Edward Jones legalese -- Fixed-Income Supplement Explanations:

Noncovered Fixed-income holdings

Bond Premium Amortizatioin
Bond premium is not required to be amortized on noncovered taxable bonds. Edward Jones calculates bond premium amortization on noncovered taxable bonds using the constant yield method and discloses the amounts in this report. However, the cost basis of the bond is not reduced by the bond premium amortization for purposes of reporting its sale, call or maturity on Form 1099-B.

Bond premium is required to be amortized on noncovered tax-exempt bonds. Edward Jones calculates bond premium amortization on noncovered tax-exempt bonds using the constant yield method and discloses the amount in this report. Bond premium amortization on noncovered tax-exempt bonds reduces the cost basis of the bond for purposes of reporting its sale, call or maturity on Form 1099-B.

Unless Mr. Slugg or others have a better idea, in the absence of any tax-exempt bond premiums on the client return in question, the Forms 1099-B information will be entered without adjustments, the taxable obligations premiums will just be ignored, and THIS ship is going to sail onward!

FE

[Roland Slugg]

The last few posts in this thread (between this one and my previous one) seem to be using the terms "bond premium" and "market discount" interchangeably. They are not. They are exact opposites. Brokers are now required to handle each ... i.e. premium or discount ... in accordance with IRS mandated treatments UNLESS the investor advises his broker to use one of the alternative options.