Accrued Interest deduct

[Jesse]

My client purchased SearsRoeb w/ accrued interest purchased $850. Normally I would deduct the accrued interest from interest income and adjust the basis of SearsRoeb, however, there is no interest reported on the 1099INT, I'm assuming timing issues, as bought early December 2007 and interest will be reported in 2008?

According to my client, the Financial Advisor is telling him he should still receive a credit for the $850 accrued interest for 2007. Is this correct?

[Jesse]

Just wanted to bump back up to the top.

[S T]

Sometimes

On the brokerage statement you might find an additional sheet that will provide you with the accrued interest.

On most of my clients the brokerage house does not include on the 1099 INT, and the additional sheet will note that these items are "not reported to the IRS". I think that is because they know that we are to make another line item adjustment on the Schedule B.

Sandy

[Jesse]

Thanks Sandy.

I do have the supplement that lists the information that is not reported to the IRS which includes the accrued interest purchased. In the past I have always had accrued interest adjustments, but in order to deduct the accrued interest shouldn't there be interest income to be reported?

Again in past years there as been interest income from the bonds purchased so I have done an adjustment for the accrued interest deducting from the interest income reported.

This year the report lists the accrued interest purchased but there is no interest income from these bonds? Can I deduct accrued interest purchased from interest that is not reported?

Will the interest be reported in 2008 and should I deduct the accrued interest in 2008?

[veritas]

Corporate bonds?

I assume.

They generally pay twice a year. I don't know but is it possible the interest won't be paid until the following year? You probably have the date the bond was issued in the detail. Let's say 3/15XX, The first payment most likely would be 9/15/xx. You buy the bond on 10/15/07 and the next payment of interest is 3/15/08.

If so I would think your would enter the accrued interest on Sch B in the year the accrued interest is paid.

[Kram BergGold]

2008

You deduct the accrued interest against the first $850 of interest. In your case this will be 2008.

[Roland Slugg]

Capitalize until interest received

The accrued interest paid upon purchase of bonds should be temporarily "capitalized." When the first interest payment is later received from that same payor, offset the capitalized interest against it. Report this offset on Schedule B, as a subtraction from the subtotal of all interest income.

For more information see IRS Pub 550, p.11 (LRH corner) and p.19.

The pattern you described will happen only when bonds are purchased during the last half of a calendar year and after the 2nd interest payment for that year has been paid. In those cases the next interest payment ... the first one paid to the bond's buyer ... will be received in the following calendar year, as is the case in your post above.

It would be incorrect to offset the accrued interest paid on the purchase of a particular bond (say Bond A) against interest received only from a different bond or bonds (say Bond B, or Bonds B-C-D...), even if the interest on such other bonds is greater than the accrued interest paid on the purchase of Bond A. The reason for this will become clear if you have a situation, as I suspect your client has, where the accrued interest paid is less than the total interest received from all other bonds, or when there is no such other interest.

There is one exception to the above rule: If a bond is purchased and then sold in the same calendar year, the accrued interest paid upon its purchase should be offset against the accrued interest received from the sale and the net difference reported on Schedule B in that year.

In the slightly different situation where a bond is purchased in one year and sold early in the next year, with no interest received from the bond issuer itself, the net interest should be reported on Schedule B in the year of sale. An example of this would be where a bond, the interest on which is paid, say, in Mar and Sep, is bought after the September interest payment (say in October) and sold the following year before the March interest payment (say in February).

[Jesse]

Thank you all very much. Roland also thank you for pointing out the final senario in your post.

[ItsThatTimeAgain]

Excellent response, Roland

The accrued interest paid upon purchase of bonds should be temporarily "capitalized." When the first interest payment is later received from that same payor, offset the capitalized interest against it. Report this offset on Schedule B, as a subtraction from the subtotal of all interest income.

For more information see IRS Pub 550, p.11 (LRH corner) and p.19.

The pattern you described will happen only when bonds are purchased during the last half of a calendar year and after the 2nd interest payment for that year has been paid. In those cases the next interest payment ... the first one paid to the bond's buyer ... will be received in the following calendar year, as is the case in your post above.

It would be incorrect to offset the accrued interest paid on the purchase of a particular bond (say Bond A) against interest received only from a different bond or bonds (say Bond B, or Bonds B-C-D...), even if the interest on such other bonds is greater than the accrued interest paid on the purchase of Bond A. The reason for this will become clear if you have a situation, as I suspect your client has, where the accrued interest paid is less than the total interest received from all other bonds, or when there is no such other interest.

There is one exception to the above rule: If a bond is purchased and then sold in the same calendar year, the accrued interest paid upon its purchase should be offset against the accrued interest received from the sale and the net difference reported on Schedule B in that year.

In the slightly different situation where a bond is purchased in one year and sold early in the next year, with no interest received from the bond issuer itself, the net interest should be reported on Schedule B in the year of sale. An example of this would be where a bond, the interest on which is paid, say, in Mar and Sep, is bought after the September interest payment (say in October) and sold the following year before the March interest payment (say in February).

Hello to Roland, and thank you for very cogent answers and explanations to Jesse's original line of questions. This is directly answering a similar question I had so thank you for helping out the community!! It was especially helpful of you to specify exactly where to go within 550 to get some "official" clarity. That was most kind:-)

[Eric2012]

Accrued Interest of one 1099 INT offset other 1099 INT regular interest?

Hi
I have a qestion this year, and it is about accrued interest.
My customer received, several 1099s INT, and one of them is a 1099 INT from Department of The Treasury Bureau of The Public Debt (I see that it is about bonds HH/H).
Actually these 1099 INT with accrued interest are really new for me.
That customer's 1099 INT shows in window number 3: $641.25, and in other part of that form shows as "accrued interest" the amount of: $25,669.09.
Because this customer has several other 1099 forms from many banks (with regular and taxable interest), which the total is less that this accrued interest, this accrued interest offset all this taxable interest and as a result I have a loss in schedule B (which is going to be in line 8a in 1040 form). Is that correct? I never have a loss in line 8a of form 1040. (By the way, If I have a loss in 8a, that would offset also the AGI).

I am thinking that the accrued interest just offset the interest of that bond, not the other interest from other 1099 INT form.
I am making a search reading the pub 550, but still don't get it.
Thanks in advance for your help