Taxation of Treasury bills, notes and bonds

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Blues
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

Good to hear, Artsdoctor.

The only anticipated difference for us next year will be the inclusion of accrued market discount, presumably reported on line 1f of our 1099-B.

My understanding is that it will require the preparation of Form 8949 and reporting "Code D" in column f, with the total of the accrued market discount reported in column g of that form. That amount would subsequently be reported as interest income in box 3 of a new (dummy) 1099-INT created by me.

Please feel free to correct any incorrect assumptions on my part. (For example, I am not sure whether I will also have to alter any "basis" or reported gain.)

Thanks in advance to you or anyone else who might clarify...as this will be our first time reporting market discount for Treasury instruments on our tax return.
MisterMister
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Re: Verification of OID reported by Vanguard for TIPS

Post by MisterMister »

Kevin M wrote: Sat Feb 18, 2023 9:15 pm I completed my first verification of the OID reported for TIPS by Vanguard just now. My calculated results match Vanguard's exactly.

Vanguard OID details for TIPS look like this:

Image

I found this a little confusing at first. Here is the interpretation.
  • For this account, there were two purchases of the TIPS maturing 1/15/2023: one purchase of 40 on 8/11/22 and one of 10 on 8/16/22.
  • The first date shown for each lot is the purchase settlement date, and the subsequent dates are the first of each subsequent month up to December.
  • The OID shown for a date is the inflation adjustment for that date to the first of the next month.
  • A total is shown for each lot, with the grand total at the bottom. This is the number shown on 1099-OID.
Image

Here are the instructions for calculating OID for TIPS from IRS Pub 1212:
1. Add the inflation-adjusted principal
amount for the day after the last day of the
tax year and any principal payments you
received during the year. (For TIPS, multi-
ply the par value by the index ratio for the
day after the last day of the tax year, and
add any principal payments received.)

2. Subtract from (1) above the inflation-ad-
justed principal amount for the first day on
which you held the debt instrument during
the tax year. (For TIPS, subtract from (1)
above the product of the par value times
the index ratio for the first day held during
the tax year.)
Following these instructions, we'd just calculate the OID from purchase settlement to 1/1/2023, but we can calculate it for each month as Vanguard does by using the first day of the next month for each row.

Here is a table showing the results of my calculations:

Image

We can see that these numbers match Vanguard's exactly!

For the last row of each lot, I calculated the OID from settlement to 1/1/2023, which equals the total of the individual month's OIDs.

I already have a spreadsheet with ref CPI for each date, which I import into this sheet, and then grab the ref CPI for each date from there using VLOOKUP on the date.

Index ratio for each date is calculated by dividing ref CPI for that date by dated date ref CPI, which I also import from another spreadsheet.

Inflation adjusted principal is just the face value times the index ratio.

OID for each row is the inflation adjusted principle for the first of the next month minus the inflation adjusted principal for the current row.

So, no problems so far with just entering the Vanguard OID number from 1099-OID into tax software, or using the imported 1099-OID. Yay!

I'll check the OID for the other Vanguard accounts that held TIPS in 2022 as I work on those tax returns. I did not hold any TIPS in taxable at Fidelity in 2022, so won't be able to check Fidelity OID for TIPS--at least not based on the accounts I manage.

Kevin
With the Fidelity 1099-OID, you'd see only a single line item for the CUSIP, showing a total OID of 929.57. If you wanted to match that figure you'd need to avoid using the index ratios directly (5 digits of precision are not enough), and go back to the reference CPIs as you've done.

The dated reference CPI for the 1/15/23 TIPs was 230.82203, so calculating the OID for the two lots totals for the year would look like this:

[(298.01200 - 293.59116) / 230.82203] (40000) = $766.10
[(298.01200 - 294.23874) / 230.82203] (10000) = $163.47

for a total of 929.57

This is the approach I had to take to verify my own Fidelity 1099-OID.
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Blues
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

By the way, and FWIW, I just came across a short paper on the subject of "market discount" which explains in clear English as opposed to government-ese how it is treated for tax purposes. (I had already figured much of this out last night by reading instructions for Form 8949 et al, but this is really helpful, imho.)

It's a (safe) link to a paper published online by Hilltop Securities and it is two pages in length. I highly recommend it to newcomers to purchasing notes and bonds in the secondary market, like myself. It makes many things clearer and easier to understand.


https://www.hilltopsecurities.com/wp-co ... -rules.pdf
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Kevin M
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

^Thanks for sharing this. I like your simplification of the algebra. I wanted to do it first in a way that followed the IRS instructions step by step.
If I make a calculation error, #Cruncher probably will let me know.
HereToLearn
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Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

cas wrote: Fri Nov 18, 2022 9:38 am
HereToLearn wrote: Thu Nov 17, 2022 9:25 pm I understand that I am supposed to subtract the accrued interest that I paid the seller in order to determine how much income I need to report. Is there any way to obtain this info before the 1099 is produced?
It is a separate line item on the purchase confirmation that your brokerage produced when you bought the treasury. If you didn't pull the confirmation and put in your tax records already, that purchase confirmation should be available somewhere on your brokerage's website.
I am asking because I am trying to project my tax liability for this year before the end of the year.
The "this year" part is where it gets a bit complicated.

The issue is that treasury bonds/notes pay interest every 6 months. They pay the whole 6 months interest to the person who owns the treasury at the time the interest is paid. So, your 1099-INT will include the whole 6 months interest, even if you bought the treasury part way through the 6 months period and had to pay the seller of the bond part of that interest.

Quite reasonably, you may say "Hey! It isn't fair that I have to pay tax on interest that I had to give to someone else." The IRS agrees, and lets you subtract the "accrued interest paid to seller" on your Schedule B. From IRS Publication 550 (reformatted a bit by me)
If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates...
  • include the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1.
  • Then, below a subtotal of all interest income listed, enter “Accrued Interest” and the amount of accrued interest you paid to the seller. That amount is taxable to the seller, not you.
  • Subtract that amount from the interest income subtotal. Enter the result on line 2b of Form 1040 or 1040-SR.
Two complications here:

Complication 1)

The accrued interest paid to seller is NOT on the 1099-INT and will NOT import automatically into your tax software (or be obvious to your paid tax preparer.) You will have to remember to make a manual adjustment in your tax software (or specifically alert your paid tax preparer). In Turbotax this manual adjustment is fairly straightforward:
  • Click on the specific 1099-INT you imported.
  • Click "Continue" on the page showing all the specific 1099-INT box entries
  • Click "Continue" on the page with the question about the financial institution's FEIN
  • On the page that says "Tell us if any of these uncommon situations apply," check the checkbox that says "We need to adjust the taxable amount" and "Continue"
  • Enter the amount and click the checkbox that says "My accrued interest is included in this Form 1099-INT"
  • Potential complication: Read carefully the "Important" note at the bottom of that page that says that *if* you have both treasury and non-treasury interest reported on that same 1099-INT (e.g. maybe, in the same brokerage account, you have both treasuries and brokered CDs bought on the secondary market), you are going to have to back up, manually create two separate dummy 1099-INTs to separate out the two types of interest, then report the accrued interest paid to seller for the treasury on the dummy 1099-INT that reports solely the interest from treasuries. (And, correspondingly, accrued interest paid to seller for, say, brokered CDs, on the dummy 1099-INT for non-US Government obligations.) Probably none of this is relevant if you live in a state with no state income tax.
  • Turbotax will then properly handle printing the required "Accrued Interest" wording in the right place on the Schedule B and doing the needed subtraction and carrying forward the right amount of Treasury interest to be deducted on the state tax return.
All of the above sounds more complicated than it is. It is just a few click-click-clicks, unless you get into the situation of needing to create the multiple dummy 1099-INTs. The hard part is ***remembering to do it.***

Complication 2: Figuring out what year's tax return to do all of the above upon.

The IRS doesn't want you subtracting the "accrued interest paid to seller" from your income until the tax year when you actually received the 6 months worth of interest to which it corresponds.

Example 1: In September 2022, you buy a treasury note on the secondary market that pays interest in April and October. You receive your first interest payment from this note in October 2022.

Therefore, you subtract the accrued interest paid to seller for this particular note on your *2022* federal tax return (due April 2023).

Example 2: In September 2022, you buy a treasury note on the secondary market that pays interest in February and August. Therefore, you don't receive your first interest payment from this note until February *2023*.

Therefore, you subtract the accrued interest paid to seller for this particular note on your *2023* federal tax return (due April *2024*).

(For more information on this tax year complication see previous Boglehead's thread: Reporting Accrued Bond Interest Paid

My recommendation:
  • Pull, from your brokerage website, the brokerage confirmation for each treasury note/bond that you bought on the secondary market
  • Circle the line item showing the accrued interest paid to seller
  • Look at the description of the bond (look for what month it was *originally* issued) and write a note on when (month/year) *you* will first receive interest from this treasury
  • Write a note to yourself reminding yourself what needs to be done with the accrued interest paid to seller
  • Stick the whole thing in your tax folder for the *appropriate tax year* as a memory jog.
CAS--or anyone else who has already been through this and understands.

Thank you again for this highly detailed explanation.

I just want to triple check before I start deleting things in TurboTax.

The example you provided above outlines my situation: A 1099-INT from Fidelity reporting both CD interest and T-bill interest, and I some of the T-bill purchases had accrued interest, some of which had payments in 2022 and some in 2023.

I am reviewing the purchase confirmations which had accrued interest and then once I confirm which had coupon payments in 2022, I should delete the T-bill interest from the Fidelity 1099-INT I imported and create a new 1099-INT to report both the T-bill interest paid AND the adjustment for accrued interest. Is that correct?

Or do I need to delete the 1099-INT entirely and create two new entries: one for the CD interest, which does not require and adjustments, and one of the T-bill interest, which does require adjustments? In other words, will it suffice to simply delete the T-bill interest and then create a new INT-1099 for the T-bill interest less accrued interest.

Thank you!
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Kevin M
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

HereToLearn wrote: Sun Feb 19, 2023 2:48 pm CAS--or anyone else who has already been through this and understands.

Thank you again for this highly detailed explanation.

I just want to triple check before I start deleting things in TurboTax.

The example you provided above outlines my situation: A 1099-INT from Fidelity reporting both CD interest and T-bill interest, and I some of the T-bill purchases had accrued interest, some of which had payments in 2022 and some in 2023.

I am reviewing the purchase confirmations which had accrued interest and then once I confirm which had coupon payments in 2022, I should delete the T-bill interest from the Fidelity 1099-INT I imported and create a new 1099-INT to report both the T-bill interest paid AND the adjustment for accrued interest. Is that correct?

Or do I need to delete the 1099-INT entirely and create two new entries: one for the CD interest, which does not require and adjustments, and one of the T-bill interest, which does require adjustments? In other words, will it suffice to simply delete the T-bill interest and then create a new INT-1099 for the T-bill interest less accrued interest.

Thank you!
First, Treasury bills do not pay interest, so there cannot be accrued interest. You are talking about a notes and/or bonds (it doesn't matter which).

I use HR Block, but TT should be similar, and is as I recall from when I used it.

You do not delete the 1099-int. There should be a box to include an adjustment, which in HRB is "Interest income requires and adjustment". After clicking that, I see several choices, including "Bought or sold this bond between interest payments", which I select. On the next screen I can enter the accrued interest, which for the buyer is entered as a positive number. The software will then include a negative number for the accrued interest adjustment on Schedule B.

Technically you should only include accrued interest for notes or bonds that paid interest in 2022, and deduct the remainder for 2023 taxes.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
HereToLearn
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Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin M wrote: Sun Feb 19, 2023 3:23 pm
HereToLearn wrote: Sun Feb 19, 2023 2:48 pm CAS--or anyone else who has already been through this and understands.

Thank you again for this highly detailed explanation.

I just want to triple check before I start deleting things in TurboTax.

The example you provided above outlines my situation: A 1099-INT from Fidelity reporting both CD interest and T-bill interest, and I some of the T-bill purchases had accrued interest, some of which had payments in 2022 and some in 2023.

I am reviewing the purchase confirmations which had accrued interest and then once I confirm which had coupon payments in 2022, I should delete the T-bill interest from the Fidelity 1099-INT I imported and create a new 1099-INT to report both the T-bill interest paid AND the adjustment for accrued interest. Is that correct?

Or do I need to delete the 1099-INT entirely and create two new entries: one for the CD interest, which does not require and adjustments, and one of the T-bill interest, which does require adjustments? In other words, will it suffice to simply delete the T-bill interest and then create a new INT-1099 for the T-bill interest less accrued interest.

Thank you!
First, Treasury bills do not pay interest, so there cannot be accrued interest. You are talking about a notes and/or bonds (it doesn't matter which).

I use HR Block, but TT should be similar, and is as I recall from when I used it.

You do not delete the 1099-int. There should be a box to include an adjustment, which in HRB is "Interest income requires and adjustment". After clicking that, I see several choices, including "Bought or sold this bond between interest payments", which I select. On the next screen I can enter the accrued interest, which for the buyer is entered as a positive number. The software will then include a negative number for the accrued interest adjustment on Schedule B.

Technically you should only include accrued interest for notes or bonds that paid interest in 2022, and deduct the remainder for 2023 taxes.

Kevin
Thanks Kevin!

I sensed that I was using the wrong term (T-bill vs note), and should have verified before I wrote my note. I have a mix of the two types and seem unable to remember the proper name.

CAS had written this back in November, which is why I thought I had to segregate CD interest from T note interest.

"Potential complication: Read carefully the "Important" note at the bottom of that page that says that *if* you have both treasury and non-treasury interest reported on that same 1099-INT (e.g. maybe, in the same brokerage account, you have both treasuries and brokered CDs bought on the secondary market), you are going to have to back up, manually create two separate dummy 1099-INTs to separate out the two types of interest, then report the accrued interest paid to seller for the treasury on the dummy 1099-INT that reports solely the interest from treasuries."

It will be slightly easier if I do not need to separate the two, but I wanted to confirm as this is my first year with Treasuries.

TT screens offer 'I need to adjust the taxable amount', then

'Report any adjustment to your interest as a positive #.
Enter a negative # if you need to add to the interest reported.

Under Reasons, I will select:
'My accrued interest is included in this Form 1099-INT."

OK--Am really confused here. Isn't this backwards? Wouldn't a negative # reduce the interest reported and therefore reduce one's tax liability?

Once again, THANK YOU!
cas
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Re: Taxation of Treasury bills, notes and bonds

Post by cas »

HereToLearn wrote: Sun Feb 19, 2023 2:48 pm CAS--or anyone else who has already been through this and understands.

[. . .]

I just want to triple check before I start deleting things in TurboTax.

The example you provided above outlines my situation: A 1099-INT from Fidelity reporting both CD interest and T-bill interest, [ . . .]
I think you are referring specifically to the "important" note on one of the Turbotax screens that I mentioned, where you have to work around Turbotax not being able to walk and chew gum at the same time? (i.e. It gets confused if you try to do adjustments on a 1099-INT that is reporting more than one sort of interest.):
HereToLearn wrote: Sun Feb 19, 2023 2:48 pm
cas wrote: Fri Nov 18, 2022 9:38 am
[*]Potential complication: Read carefully the "Important" note at the bottom of that page that says that *if* you have both treasury and non-treasury interest reported on that same 1099-INT (e.g. maybe, in the same brokerage account, you have both treasuries and brokered CDs bought on the secondary market), you are going to have to back up, manually create two separate dummy 1099-INTs to separate out the two types of interest, then report the accrued interest paid to seller for the treasury on the dummy 1099-INT that reports solely the interest from treasuries. (And, correspondingly, accrued interest paid to seller for, say, brokered CDs, on the dummy 1099-INT for non-US Government obligations.) Probably none of this is relevant if you live in a state with no state income tax.
So your Fidelity 1099-INT has a number in both Box 1 (interest NOT from a treasury, taxable at both federal and state level) and Box 3 (interest from a treasury, taxable at federal level but not at state level), right?

Without experimenting with Turbotax I'm not 100% sure, but I think the issue is getting Turbotax to understand whether the "accrued interest paid to seller" goes with the Box 1 interest or the Box 3 interest. If Turbotax willy-nilly chooses one and chooses wrong, it will end up with either too little non-treasury interest taxed on the state return or too much treasury interest deducted from the state return. Either way, you would end up underpaying your state taxes.

And Turbotax's workaround is "just pretend you got 2 separate 1099-INTs: one 1099-INT with something in Box 1 and nothing in Box 3, and a second 1099-INT with nothing in Box 1 and something in Box 3". Then when you enter the "accrued interest paid to seller" on the second 1099-INT, Turbotax will figure out that it goes with treasury interest (because there is nothing in Box 1 on that second 1099-INT) and carry the right number down to the state tax return. You put the number from the original 1099-INT Box 1 on the first "dummy" 1099-INT (and blank in Box 3). And the number from the original 1099-INT Box 3 on the second "dummy" 1099-INT (and 0 in Box 1).

Do check that the 2022 version of Turbotax still has the same warning message about needing to do this.

And check that the amounts for treasury and non-treasury interest on your state tax return come out right, however it is that your state return handles that sort of thing.

You might want to do a small experiment with this ... maybe even with a "test" tax return that contains nothing except the two "dummy" 1099-INTs, if you have desktop Turbotax that allows multiple returns ... to make sure how it works before going whole hog deleting a bunch of stuff on your real tax return.

I've never had to do this manuever with Turbotax for this particular reason (Box 1 and Box 3 interest + adjustment that needs to go specifically with one or the other). However, I have had to do the "two "dummy" 1099-INTs = 1 "real" 1099-INT approach in some other situations, with Turbotax instructions saying that is the way to do it. I'm pretty sure I've seen other people on bogleheads post about having do take this "two 1099-INTs" approach to work around some limitation in HR Block as well. The IRS doesn't seem to care as long as the numbers on the Schedule B (before you start subtracting the adjustments) all add up to what was on the original 1099-INT.

Hopefully someone who is actively having to deal with this situation on their own tax return will show up. (I have to admit that I wrote this without having Turbotax open in front of me.)
HereToLearn
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Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

cas wrote: Sun Feb 19, 2023 4:30 pm
HereToLearn wrote: Sun Feb 19, 2023 2:48 pm CAS--or anyone else who has already been through this and understands.

[. . .]

I just want to triple check before I start deleting things in TurboTax.

The example you provided above outlines my situation: A 1099-INT from Fidelity reporting both CD interest and T-bill interest, [ . . .]
I think you are referring specifically to the "important" note on one of the Turbotax screens that I mentioned, where you have to work around Turbotax not being able to walk and chew gum at the same time? (i.e. It gets confused if you try to do adjustments on a 1099-INT that is reporting more than one sort of interest.):
HereToLearn wrote: Sun Feb 19, 2023 2:48 pm
cas wrote: Fri Nov 18, 2022 9:38 am
[*]Potential complication: Read carefully the "Important" note at the bottom of that page that says that *if* you have both treasury and non-treasury interest reported on that same 1099-INT (e.g. maybe, in the same brokerage account, you have both treasuries and brokered CDs bought on the secondary market), you are going to have to back up, manually create two separate dummy 1099-INTs to separate out the two types of interest, then report the accrued interest paid to seller for the treasury on the dummy 1099-INT that reports solely the interest from treasuries. (And, correspondingly, accrued interest paid to seller for, say, brokered CDs, on the dummy 1099-INT for non-US Government obligations.) Probably none of this is relevant if you live in a state with no state income tax.
So your Fidelity 1099-INT has a number in both Box 1 (interest NOT from a treasury, taxable at both federal and state level) and Box 3 (interest from a treasury, taxable at federal level but not at state level), right?

Without experimenting with Turbotax I'm not 100% sure, but I think the issue is getting Turbotax to understand whether the "accrued interest paid to seller" goes with the Box 1 interest or the Box 3 interest. If Turbotax willy-nilly chooses one and chooses wrong, it will end up with either too little non-treasury interest taxed on the state return or too much treasury interest deducted from the state return. Either way, you would end up underpaying your state taxes.

And Turbotax's workaround is "just pretend you got 2 separate 1099-INTs: one 1099-INT with something in Box 1 and nothing in Box 3, and a second 1099-INT with nothing in Box 1 and something in Box 3". Then when you enter the "accrued interest paid to seller" on the second 1099-INT, Turbotax will figure out that it goes with treasury interest (because there is nothing in Box 1 on that second 1099-INT) and carry the right number down to the state tax return. You put the number from the original 1099-INT Box 1 on the first "dummy" 1099-INT (and blank in Box 3). And the number from the original 1099-INT Box 3 on the second "dummy" 1099-INT (and 0 in Box 1).

Do check that the 2022 version of Turbotax still has the same warning message about needing to do this.

And check that the amounts for treasury and non-treasury interest on your state tax return come out right, however it is that your state return handles that sort of thing.

You might want to do a small experiment with this ... maybe even with a "test" tax return that contains nothing except the two "dummy" 1099-INTs, if you have desktop Turbotax that allows multiple returns ... to make sure how it works before going whole hog deleting a bunch of stuff on your real tax return.

I've never had to do this manuever with Turbotax for this particular reason (Box 1 and Box 3 interest + adjustment that needs to go specifically with one or the other). However, I have had to do the "two "dummy" 1099-INTs = 1 "real" 1099-INT approach in some other situations, with Turbotax instructions saying that is the way to do it. I'm pretty sure I've seen other people on bogleheads post about having do take this "two 1099-INTs" approach to work around some limitation in HR Block as well. The IRS doesn't seem to care as long as the numbers on the Schedule B (before you start subtracting the adjustments) all add up to what was on the original 1099-INT.

Hopefully someone who is actively having to deal with this situation on their own tax return will show up. (I have to admit that I wrote this without having Turbotax open in front of me.)
Thank you, AGAIN.

Yes, my Fidelity 1099-INT has a number in both Box 1 (interest NOT from a treasury, taxable at both federal and state level) and Box 3 (interest from a treasury, taxable at federal level but not at state level). CD interest in box 1 and treasury interest in box 2, one of the few things not taxed by CT.

I now see the teeny tiny print (on my small MacBook Air) that says "Since you entered more than one kind of interest on this statement, the amount of your adjustment (other than premium paid on tax-exempt bonds) will be prorated between the different types of interest income. If you want this adjustment to apply to only one type of income, create a separate 1099-INT for each type of interest income and enter an adjustment for the appropriate type of interest income."

I do have the desktop TT but it really won't require much deleting so I think I will just go ahead and follow your instructions. Much more time required to pull down the confirmation sheets and then look up & tally interest payment dates in 2022 vs 2023. At least I will be organized for 2023.

Completely unrelated, but do you have any idea why you cannot enlarge the TT screen the way one can enlarge almost any other screen, by clicking Command/Shift/+?

Thank you!
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Re: Taxation of Treasury bills, notes and bonds

Post by vaylie »

Blues wrote: Fri Feb 17, 2023 9:46 am Using FreeTaxUSA (as I have now for several years), I was able to easily account for "accrued interest" on the 1099-INT, and, as in the past, the portion of our dividends derived from U.S. Gov't Obligations on the 1099-DIV, (except as stated above for the settlement fund) . The 1099-B was also a breeze.

I didn't have any accrued market discount to report this year on the Treasury notes I had purchased, but will on next year's return. (I'll keep Kevin's advice in mind in case I have to prepare a "dummy" 1099-INT to account for it.)
I had two treasury notes mature this year, and my 1099-B had 1f Accrued Market Discount values this year. On FreeTaxUSA, the site added the total to my Schedule B for me without needing to create a "dummy" 1099-INT. So you should have smooth sailing next year when you encounter the same thing.

I use OLT to double check my numbers and sadly OLT does not account for the Accrued Market Discount on the 1099-INT sections, and I may need to add it myself.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

I just tried 1099-INT in HRB with 1,000 each in box 1 and 3, and with a 100 accrued interest adjustment. The 1040 shows 1,900 interest, as expected.

The accrued interest does indeed get prorated, as the CA subtraction from the Fed 1,900 taxable is 950 leaving $950 taxable.

Assuming the acc int was for just the Treasury, splitting into two 1099-INTs with the accrued int taken from the Treasury one, we get 1,900 Fed, 900 subtracted for CA, leaving 1,000 taxable by state, which is correct since the non-Treasury (e.g., CD) $1K is taxable by the state.

So, failing to split them will result in paying less state tax than owed.

So, in this case splitting them is the correct solution. I missed the part about having income in box 1 as well as box 3.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
HereToLearn
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Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Kevin M wrote: Sun Feb 19, 2023 5:42 pm I just tried 1099-INT in HRB with 1,000 each in box 1 and 3, and with a 100 accrued interest adjustment. The 1040 shows 1,900 interest, as expected.

The accrued interest does indeed get prorated, as the CA subtraction from the Fed 1,900 taxable is 950 leaving $950 taxable.

Assuming the acc int was for just the Treasury, splitting into two 1099-INTs with the accrued int taken from the Treasury one, we get 1,900 Fed, 900 subtracted for CA, leaving 1,000 taxable by state, which is correct since the non-Treasury (e.g., CD) $1K is taxable by the state.

So, failing to split them will result in paying less state tax than owed.

So, in this case splitting them is the correct solution. I missed the part about having income in box 1 as well as box 3.

Kevin
Thank you! I will report back once I input the #s in TT, but I trust I will end up in the correct place, in light of the expert advice from you and CAS. Still compiling the transaction confirmations to ensure that I allocate accrued interest to the correct tax year.
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

vaylie wrote: Sun Feb 19, 2023 5:11 pm
Blues wrote: Fri Feb 17, 2023 9:46 am Using FreeTaxUSA (as I have now for several years), I was able to easily account for "accrued interest" on the 1099-INT, and, as in the past, the portion of our dividends derived from U.S. Gov't Obligations on the 1099-DIV, (except as stated above for the settlement fund) . The 1099-B was also a breeze.

I didn't have any accrued market discount to report this year on the Treasury notes I had purchased, but will on next year's return. (I'll keep Kevin's advice in mind in case I have to prepare a "dummy" 1099-INT to account for it.)
I had two treasury notes mature this year, and my 1099-B had 1f Accrued Market Discount values this year. On FreeTaxUSA, the site added the total to my Schedule B for me without needing to create a "dummy" 1099-INT. So you should have smooth sailing next year when you encounter the same thing.

I use OLT to double check my numbers and sadly OLT does not account for the Accrued Market Discount on the 1099-INT sections, and I may need to add it myself.
Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?

This is great info, really appreciate it.
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Klewles
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Re: Verification of OID reported by Vanguard for TIPS

Post by Klewles »

MisterMister wrote: Sun Feb 19, 2023 11:51 am
Kevin M wrote: Sat Feb 18, 2023 9:15 pm I completed my first verification of the OID reported for TIPS by Vanguard just now. My calculated results match Vanguard's exactly.

Vanguard OID details for TIPS look like this:

Image

I found this a little confusing at first. Here is the interpretation.
  • For this account, there were two purchases of the TIPS maturing 1/15/2023: one purchase of 40 on 8/11/22 and one of 10 on 8/16/22.
  • The first date shown for each lot is the purchase settlement date, and the subsequent dates are the first of each subsequent month up to December.
  • The OID shown for a date is the inflation adjustment for that date to the first of the next month.
  • A total is shown for each lot, with the grand total at the bottom. This is the number shown on 1099-OID.
Image

Here are the instructions for calculating OID for TIPS from IRS Pub 1212:
1. Add the inflation-adjusted principal
amount for the day after the last day of the
tax year and any principal payments you
received during the year. (For TIPS, multi-
ply the par value by the index ratio for the
day after the last day of the tax year, and
add any principal payments received.)

2. Subtract from (1) above the inflation-ad-
justed principal amount for the first day on
which you held the debt instrument during
the tax year. (For TIPS, subtract from (1)
above the product of the par value times
the index ratio for the first day held during
the tax year.)
Following these instructions, we'd just calculate the OID from purchase settlement to 1/1/2023, but we can calculate it for each month as Vanguard does by using the first day of the next month for each row.

Here is a table showing the results of my calculations:

Image

We can see that these numbers match Vanguard's exactly!

For the last row of each lot, I calculated the OID from settlement to 1/1/2023, which equals the total of the individual month's OIDs.

I already have a spreadsheet with ref CPI for each date, which I import into this sheet, and then grab the ref CPI for each date from there using VLOOKUP on the date.

Index ratio for each date is calculated by dividing ref CPI for that date by dated date ref CPI, which I also import from another spreadsheet.

Inflation adjusted principal is just the face value times the index ratio.

OID for each row is the inflation adjusted principle for the first of the next month minus the inflation adjusted principal for the current row.

So, no problems so far with just entering the Vanguard OID number from 1099-OID into tax software, or using the imported 1099-OID. Yay!

I'll check the OID for the other Vanguard accounts that held TIPS in 2022 as I work on those tax returns. I did not hold any TIPS in taxable at Fidelity in 2022, so won't be able to check Fidelity OID for TIPS--at least not based on the accounts I manage.

Kevin
With the Fidelity 1099-OID, you'd see only a single line item for the CUSIP, showing a total OID of 929.57. If you wanted to match that figure you'd need to avoid using the index ratios directly (5 digits of precision are not enough), and go back to the reference CPIs as you've done.

The dated reference CPI for the 1/15/23 TIPs was 230.82203, so calculating the OID for the two lots totals for the year would look like this:

[(298.01200 - 293.59116) / 230.82203] (40000) = $766.10
[(298.01200 - 294.23874) / 230.82203] (10000) = $163.47

for a total of 929.57

This is the approach I had to take to verify my own Fidelity 1099-OID.
Treasury Direct's 1099 reports OID a bit differently than Vanguard or Fidelity. For the 1/15/2023 TIPS, TD would calculate as follows:

CPI 2013-01-15: 230.82203
CPI 2022-08-11: 293.59116
CPI 2022-12-31: 297.97316

index ratio: 2022-08-11 1.2719400000 (rounded to 5 decimal places)
index ratio: 2022-12-31 1.2909200000 (rounded to 5 decimal places)

principal 2013-01-15: 40000.00
principal 2022-08-11: 50877.60
principal 2022-12-31: 51636.80

OID for 2022: 759.20

Remarks: TD rounds index ratios to 5 digits of precision, per 31 CFR Chap. 11 Part 356 App. B; as opposed to Vanguard and Fidelity, which use full precision index ratios. TD uses Dec 31 as end date for yearly OID interval; as opposed to Vanguard and Fidelity, which use Jan 1.

Years ago I wrote some code to track my TIPS portfolio based on the 31 CFR regulations. It gets exact OID matches to my TD 1099's, but only approximate matches to my Vanguard 1099's.
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Re: Taxation of Treasury bills, notes and bonds

Post by vaylie »

Blues wrote: Sun Feb 19, 2023 6:09 pm Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?
The way FTUSA set it up was to have all my 1099-INTs listed, followed by a SUBTOTAL value. Then after that, it lists an entry for "CAPITAL GAINS ACCRUED MARKET DISCOUNT."

No indication that it's from US Obligations.

Unfortunately, I can't help you with whether they correctly exclude it from state taxes because in my state (MA), the accrued market discount is taxable - so it's hard for me to say whether FTUSA omitted that part deliberately or by mistake since I'm filing my state return separately and won't be paying to see the pdf/breakdowns of their calculations.
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

vaylie wrote: Mon Feb 20, 2023 4:17 am
Blues wrote: Sun Feb 19, 2023 6:09 pm Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?
The way FTUSA set it up was to have all my 1099-INTs listed, followed by a SUBTOTAL value. Then after that, it lists an entry for "CAPITAL GAINS ACCRUED MARKET DISCOUNT."

No indication that it's from US Obligations.

Unfortunately, I can't help you with whether they correctly exclude it from state taxes because in my state (MA), the accrued market discount is taxable - so it's hard for me to say whether FTUSA omitted that part deliberately or by mistake since I'm filing my state return separately and won't be paying to see the pdf/breakdowns of their calculations.
Thank you, I appreciate it. :sharebeer
MisterMister
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Re: Verification of OID reported by Vanguard for TIPS

Post by MisterMister »

Klewles wrote: Mon Feb 20, 2023 2:55 am .
.
.
Treasury Direct's 1099 reports OID a bit differently than Vanguard or Fidelity. For the 1/15/2023 TIPS, TD would calculate as follows:

CPI 2013-01-15: 230.82203
CPI 2022-08-11: 293.59116
CPI 2022-12-31: 297.97316

index ratio: 2022-08-11 1.2719400000 (rounded to 5 decimal places)
index ratio: 2022-12-31 1.2909200000 (rounded to 5 decimal places)

principal 2013-01-15: 40000.00
principal 2022-08-11: 50877.60
principal 2022-12-31: 51636.80

OID for 2022: 759.20

Remarks: TD rounds index ratios to 5 digits of precision, per 31 CFR Chap. 11 Part 356 App. B; as opposed to Vanguard and Fidelity, which use full precision index ratios. TD uses Dec 31 as end date for yearly OID interval; as opposed to Vanguard and Fidelity, which use Jan 1.

Years ago I wrote some code to track my TIPS portfolio based on the 31 CFR regulations. It gets exact OID matches to my TD 1099's, but only approximate matches to my Vanguard 1099's.
That's interesting. As I thought, Vanguard and Fidelity's calculations are not exactly inline with pub 1212--which from Kevin's post specifically prescribes the use of the index ratio for the OID calculation.
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Re: Taxation of Treasury bills, notes and bonds

Post by MisterMister »

vaylie wrote: Mon Feb 20, 2023 4:17 am
Blues wrote: Sun Feb 19, 2023 6:09 pm Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?
The way FTUSA set it up was to have all my 1099-INTs listed, followed by a SUBTOTAL value. Then after that, it lists an entry for "CAPITAL GAINS ACCRUED MARKET DISCOUNT."

No indication that it's from US Obligations.

Unfortunately, I can't help you with whether they correctly exclude it from state taxes because in my state (MA), the accrued market discount is taxable - so it's hard for me to say whether FTUSA omitted that part deliberately or by mistake since I'm filing my state return separately and won't be paying to see the pdf/breakdowns of their calculations.
Living in a state where I cannot find specific guidance, I will choose to exclude accrued market discount from state taxable income. After all, secondary market discount for treasuries is usually to compensate for a coupon rate that is not competitive for its remaing term. It doesn't make sense to me that it should be treated differently than interest so I won't unless/until my state provides definitive guidance.
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

MisterMister wrote: Mon Feb 20, 2023 7:48 am
vaylie wrote: Mon Feb 20, 2023 4:17 am
Blues wrote: Sun Feb 19, 2023 6:09 pm Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?
The way FTUSA set it up was to have all my 1099-INTs listed, followed by a SUBTOTAL value. Then after that, it lists an entry for "CAPITAL GAINS ACCRUED MARKET DISCOUNT."

No indication that it's from US Obligations.

Unfortunately, I can't help you with whether they correctly exclude it from state taxes because in my state (MA), the accrued market discount is taxable - so it's hard for me to say whether FTUSA omitted that part deliberately or by mistake since I'm filing my state return separately and won't be paying to see the pdf/breakdowns of their calculations.
Living in a state where I cannot find specific guidance, I will choose to exclude accrued market discount from state taxable income. After all, secondary market discount for treasuries is usually to compensate for a coupon rate that is not competitive for its remaing term. It doesn't make sense to me that it should be treated differently than interest so I won't unless/until my state provides definitive guidance.
How would you go about this if the tax software, (as reported in the above instance), doesn't specifically identify the 1099-B line 1f accrued market discount on the Schedule B as interest deriving from federal obligations?
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Re: Taxation of Treasury bills, notes and bonds

Post by MisterMister »

Blues wrote: Mon Feb 20, 2023 9:10 am
MisterMister wrote: Mon Feb 20, 2023 7:48 am
vaylie wrote: Mon Feb 20, 2023 4:17 am
Blues wrote: Sun Feb 19, 2023 6:09 pm Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?
The way FTUSA set it up was to have all my 1099-INTs listed, followed by a SUBTOTAL value. Then after that, it lists an entry for "CAPITAL GAINS ACCRUED MARKET DISCOUNT."

No indication that it's from US Obligations.

Unfortunately, I can't help you with whether they correctly exclude it from state taxes because in my state (MA), the accrued market discount is taxable - so it's hard for me to say whether FTUSA omitted that part deliberately or by mistake since I'm filing my state return separately and won't be paying to see the pdf/breakdowns of their calculations.
Living in a state where I cannot find specific guidance, I will choose to exclude accrued market discount from state taxable income. After all, secondary market discount for treasuries is usually to compensate for a coupon rate that is not competitive for its remaing term. It doesn't make sense to me that it should be treated differently than interest so I won't unless/until my state provides definitive guidance.
How would you go about this if the tax software, (as reported in the above instance), doesn't specifically identify the 1099-B line 1f accrued market discount on the Schedule B as interest deriving from federal obligations?
Haven't been through the process yet, but see Kevin's post which discusses this: viewtopic.php?p=6965402#p6965402
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

MisterMister wrote: Mon Feb 20, 2023 9:37 am
Blues wrote: Mon Feb 20, 2023 9:10 am
MisterMister wrote: Mon Feb 20, 2023 7:48 am
vaylie wrote: Mon Feb 20, 2023 4:17 am
Blues wrote: Sun Feb 19, 2023 6:09 pm Thank you for that, vaylie. Does the entry on the Schedule B indicate that the interest is from U.S. Obligations (to save on state tax)?
The way FTUSA set it up was to have all my 1099-INTs listed, followed by a SUBTOTAL value. Then after that, it lists an entry for "CAPITAL GAINS ACCRUED MARKET DISCOUNT."

No indication that it's from US Obligations.

Unfortunately, I can't help you with whether they correctly exclude it from state taxes because in my state (MA), the accrued market discount is taxable - so it's hard for me to say whether FTUSA omitted that part deliberately or by mistake since I'm filing my state return separately and won't be paying to see the pdf/breakdowns of their calculations.
Living in a state where I cannot find specific guidance, I will choose to exclude accrued market discount from state taxable income. After all, secondary market discount for treasuries is usually to compensate for a coupon rate that is not competitive for its remaing term. It doesn't make sense to me that it should be treated differently than interest so I won't unless/until my state provides definitive guidance.
How would you go about this if the tax software, (as reported in the above instance), doesn't specifically identify the 1099-B line 1f accrued market discount on the Schedule B as interest deriving from federal obligations?
Haven't been through the process yet, but see Kevin's post which discusses this: viewtopic.php?p=6965402#p6965402
Yeah, I've read it. What I'm not clear on, given what vaylie has written above in regard to FreeTaxUSA, is whether it's possible to both use the software in regard to re-characterizing the line 1f accrued market discount, and still report the income as deriving from Treasury obligations, either with or without doing a dummy 1099-INT.

I suppose I won't know until I actually get there next year. It seems that there "should" be a way of doing so...
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Re: Taxation of Treasury bills, notes and bonds

Post by MisterMister »

Blues wrote: Mon Feb 20, 2023 9:54 am Yeah, I've read it. What I'm not clear on, given what vaylie has written above in regard to FreeTaxUSA, is whether it's possible to both use the software in regard to re-characterizing the line 1f accrued market discount, and still report the income as deriving from Treasury obligations, either with or without doing a dummy 1099-INT.

I suppose I won't know until I actually get there next year. It seems that there "should" be a way of doing so...
OK, I've played a bit with HRB and here's is what I think will work. I'll only talk about HRB. I am not a tax professional and this is not tax advice.

In HRB, when entering 1099-B box 1f, an interview question prompts "What's your market adjustment". HRB notes "Your market discount adjustment is considered interest income. Tell us the amount here but you'll also need to enter it in Interest Income (Form 1099-INT)". Here you enter the discount as a negative number, presumably the same value in 1f. The result is that the discount is not included in your capital gain.

Now you must create a dummy 1099-INT in the amount of the market discount, so that you pay federal tax on the discount. If you enter the amount in box 3, it will be excluded from eligibility for state income tax and thus deducted from your total interest income for state purposes (here I assume HRB is used to prepare the state return).

I don't think federal Schedule B is affected by this; there is an adjustment made on form 8949 for the discount.

It's up to you to verify the resulting returns are correct, and I assume a similar process applies to other software.
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

MisterMister wrote: Mon Feb 20, 2023 10:59 am
Blues wrote: Mon Feb 20, 2023 9:54 am Yeah, I've read it. What I'm not clear on, given what vaylie has written above in regard to FreeTaxUSA, is whether it's possible to both use the software in regard to re-characterizing the line 1f accrued market discount, and still report the income as deriving from Treasury obligations, either with or without doing a dummy 1099-INT.

I suppose I won't know until I actually get there next year. It seems that there "should" be a way of doing so...
OK, I've played a bit with HRB and here's is what I think will work. I'll only talk about HRB. I am not a tax professional and this is not tax advice.

In HRB, when entering 1099-B box 1f, an interview question prompts "What's your market adjustment". HRB notes "Your market discount adjustment is considered interest income. Tell us the amount here but you'll also need to enter it in Interest Income (Form 1099-INT)". Here you enter the discount as a negative number, presumably the same value in 1f. The result is that the discount is not included in your capital gain.

Now you must create a dummy 1099-INT in the amount of the market discount, so that you pay federal tax on the discount. If you enter the amount in box 3, it will be excluded from eligibility for state income tax and thus deducted from your total interest income for state purposes (here I assume HRB is used to prepare the state return).

I don't think federal Schedule B is affected by this; there is an adjustment made on form 8949 for the discount.

It's up to you to verify the resulting returns are correct, and I assume a similar process applies to other software.
Thanks, MisterMister. That makes perfect sense and is crystal clear. I hope it will work the same way with FreeTaxUSA when the time comes.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

^This is what I've done in the past. If your position is that Treasury market discount is exempt from your state income tax, you enter it in box 3 of the dummy 1099-INT, and if not, box 1.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

Kevin M wrote: Mon Feb 20, 2023 11:33 am ^This is what I've done in the past. If your position is that Treasury market discount is exempt from your state income tax, you enter it in box 3 of the dummy 1099-INT, and if not, box 1.
Thanks, Kevin, that's where I first learned of this technique. What gives me pause is vaylie's comment:
I had two treasury notes mature this year, and my 1099-B had 1f Accrued Market Discount values this year. On FreeTaxUSA, the site added the total to my Schedule B for me without needing to create a "dummy" 1099-INT. So you should have smooth sailing next year when you encounter the same thing.
On HRB, apparently, it does an 8949 adjustment to the line 1f amount...but allows you to do the input via 1099-INT. Whereas, if vaylie's experience with FTUSA is the only available option, then there might not be a workaround to ensure that the interest can be reported as deriving from treasury obligations.

Hence my quandary.
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Re: Taxation of Treasury bills, notes and bonds

Post by cas »

MisterMister wrote: Mon Feb 20, 2023 10:59 am I'll only talk about HRB. [. . .] I assume a similar process applies to other software.
FWIW, it does not work the same way for Turbotax or, apparently, for FreeTaxUSA. (Links are to previous posts in this thread, which I mention because sometimes intra-thread links don't work.)

What does seem to be a general trend is that the major tax programs (or at least those examined in this thread so far) seem to punt the "is (treasury) market discount 1099-INT Box 1 or Box 3?" decision to the individual tax payer, whether it be via the "create your own dummy 1099-INT" approach (HRB) or the "go to forms mode on your state tax return, find the field that can be adjusted, and attach the statement in the format that your state requires" approach of Turbotax (for my particular state. I don't know what they do for other states.) Whether that is because it is too infrequent an issue for it to be cost effective to code/maintain all the permutations in their software or because they also think the issue is potentially debatable (like Kevin mentioned in his OP) and don't want to find themselves in state tax court justifying a coded approach, I don't know.

Of course, there are completely legal approaches for other unrelated "adjustment" issues that pop up in various tax software that involve getting the software to do what you want using chewing gum and bailing twine. But this particular issue seems mired enough in (often ambiguous) state tax code and state court decisions that I'm not comfortable recommending any particular chewing gum and bailing twine approach as generally applicable to everyone on a public forum.

(Please note: if people want to pick up the unresolved discussion on "which 1099-INT box is it?" again, that probably has the potential to clog up this thread for people trying to grasp specific tax reporting questions. As I indirectly linked above, that has already been fairly extensively discussed in a different thread. Up to Kevin, really, what thread he would rather future discussion on the "which 1099-INT box is it?" question goes.
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Re: Verification of OID reported by Vanguard for TIPS

Post by Kevin M »

Klewles wrote: Mon Feb 20, 2023 2:55 am
MisterMister wrote: Sun Feb 19, 2023 11:51 am
Kevin M wrote: Sat Feb 18, 2023 9:15 pm I completed my first verification of the OID reported for TIPS by Vanguard just now. My calculated results match Vanguard's exactly.

Vanguard OID details for TIPS look like this:

Image

I found this a little confusing at first. Here is the interpretation.
  • For this account, there were two purchases of the TIPS maturing 1/15/2023: one purchase of 40 on 8/11/22 and one of 10 on 8/16/22.
  • The first date shown for each lot is the purchase settlement date, and the subsequent dates are the first of each subsequent month up to December.
  • The OID shown for a date is the inflation adjustment for that date to the first of the next month.
  • A total is shown for each lot, with the grand total at the bottom. This is the number shown on 1099-OID.
Image

Here are the instructions for calculating OID for TIPS from IRS Pub 1212:
1. Add the inflation-adjusted principal
amount for the day after the last day of the
tax year and any principal payments you
received during the year. (For TIPS, multi-
ply the par value by the index ratio for the
day after the last day of the tax year, and
add any principal payments received.)

2. Subtract from (1) above the inflation-ad-
justed principal amount for the first day on
which you held the debt instrument during
the tax year. (For TIPS, subtract from (1)
above the product of the par value times
the index ratio for the first day held during
the tax year.)
Following these instructions, we'd just calculate the OID from purchase settlement to 1/1/2023, but we can calculate it for each month as Vanguard does by using the first day of the next month for each row.

Here is a table showing the results of my calculations:

Image

We can see that these numbers match Vanguard's exactly!

For the last row of each lot, I calculated the OID from settlement to 1/1/2023, which equals the total of the individual month's OIDs.

I already have a spreadsheet with ref CPI for each date, which I import into this sheet, and then grab the ref CPI for each date from there using VLOOKUP on the date.

Index ratio for each date is calculated by dividing ref CPI for that date by dated date ref CPI, which I also import from another spreadsheet.

Inflation adjusted principal is just the face value times the index ratio.

OID for each row is the inflation adjusted principle for the first of the next month minus the inflation adjusted principal for the current row.

So, no problems so far with just entering the Vanguard OID number from 1099-OID into tax software, or using the imported 1099-OID. Yay!

I'll check the OID for the other Vanguard accounts that held TIPS in 2022 as I work on those tax returns. I did not hold any TIPS in taxable at Fidelity in 2022, so won't be able to check Fidelity OID for TIPS--at least not based on the accounts I manage.

Kevin
With the Fidelity 1099-OID, you'd see only a single line item for the CUSIP, showing a total OID of 929.57. If you wanted to match that figure you'd need to avoid using the index ratios directly (5 digits of precision are not enough), and go back to the reference CPIs as you've done.

The dated reference CPI for the 1/15/23 TIPs was 230.82203, so calculating the OID for the two lots totals for the year would look like this:

[(298.01200 - 293.59116) / 230.82203] (40000) = $766.10
[(298.01200 - 294.23874) / 230.82203] (10000) = $163.47

for a total of 929.57

This is the approach I had to take to verify my own Fidelity 1099-OID.
Treasury Direct's 1099 reports OID a bit differently than Vanguard or Fidelity. For the 1/15/2023 TIPS, TD would calculate as follows:

CPI 2013-01-15: 230.82203
CPI 2022-08-11: 293.59116
CPI 2022-12-31: 297.97316

index ratio: 2022-08-11 1.2719400000 (rounded to 5 decimal places)
index ratio: 2022-12-31 1.2909200000 (rounded to 5 decimal places)

principal 2013-01-15: 40000.00
principal 2022-08-11: 50877.60
principal 2022-12-31: 51636.80

OID for 2022: 759.20

Remarks: TD rounds index ratios to 5 digits of precision, per 31 CFR Chap. 11 Part 356 App. B; as opposed to Vanguard and Fidelity, which use full precision index ratios. TD uses Dec 31 as end date for yearly OID interval; as opposed to Vanguard and Fidelity, which use Jan 1.

Years ago I wrote some code to track my TIPS portfolio based on the 31 CFR regulations. It gets exact OID matches to my TD 1099's, but only approximate matches to my Vanguard 1099's.
IRS Pub 1212 specifically states to use the day after the last day of the tax year, which is 1/1/2023 for 2022 returns. So, TD is doing it incorrectly according to the pub. #Cruncher has specifically mentioned that OID needs to be recalculated for TD 1099-OID.

I believe that #Cruncher has said that both ref CPI and index ratio should be rounded to 5 decimal places. If I round the ref CPIs this way, I get the same results as with no rounding. However, if I round index ratios to 5 decimal places, the numbers change slightly.

For the 40 lot I get 766.00 instead of 766.10, so both would be entered as 766.

For the 10 lot I get 163.50 instead of 163.47. The former is entered as 164 and the latter as 163 in HRB, so this would make a total difference of $1 for both lots.

The CFR Appendix says truncate to 6 and round to 5 for both ref CPI and index ratio. If I do that, I get the same results as just rounding to 5.

I am sticking with calculations that match the Vanguard OID numbers. The difference is tiny, and I'd prefer that the reported numbers match the 1099-OID numbers.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

cas wrote: Mon Feb 20, 2023 12:06 pm (Please note: if people want to pick up the unresolved discussion on "which 1099-INT box is it?" again, that probably has the potential to clog up this thread for people trying to grasp specific tax reporting questions. As I indirectly linked above, that has already been fairly extensively discussed in a different thread. Up to Kevin, really, what thread he would rather future discussion on the "which 1099-INT box is it?" question goes.
I agree with your thinking. Let's use the other thread for any detailed discussion of "which box?". I recommend that anyone struggling with (or just interested in) this issue read that thread first, then ask additional questions or provide additional inputs in that thread.

Thanks,

Kevin
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Re: Taxation of Treasury bills, notes and bonds

Post by FactualFran »

cas wrote: Mon Feb 20, 2023 12:06 pm (Please note: if people want to pick up the unresolved discussion on "which 1099-INT box is it?" again, that probably has the potential to clog up this thread for people trying to grasp specific tax reporting questions. As I indirectly linked above, that has already been fairly extensively discussed in a different thread. Up to Kevin, really, what thread he would rather future discussion on the "which 1099-INT box is it?" question goes.
It is likely a good idea to have separate topics for 1) what is to be on Federal and State income tax returns and 2) how to get certain tax preparation software to produce what is to be on income tax returns.

Manually entered dummy 1099s? Yikes!

Income tax preparation software should import real 1099s. The software might need to ask for additional information, such as whether there are adjustments, such as accrued interest, to be made to the values in imported 1099s. The software should ask for enough information to produce correct Federal and State income tax returns.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

FactualFran wrote: Mon Feb 20, 2023 2:23 pm
cas wrote: Mon Feb 20, 2023 12:06 pm (Please note: if people want to pick up the unresolved discussion on "which 1099-INT box is it?" again, that probably has the potential to clog up this thread for people trying to grasp specific tax reporting questions. As I indirectly linked above, that has already been fairly extensively discussed in a different thread. Up to Kevin, really, what thread he would rather future discussion on the "which 1099-INT box is it?" question goes.
It is likely a good idea to have separate topics for 1) what is to be on Federal and State income tax returns and 2) how to get certain tax preparation software to produce what is to be on income tax returns.

Manually entered dummy 1099s? Yikes!

Income tax preparation software should import real 1099s. The software might need to ask for additional information, such as whether there are adjustments, such as accrued interest, to be made to the values in imported 1099s. The software should ask for enough information to produce correct Federal and State income tax returns.
Maybe the software should do that, but it doesn't, so we must find workarounds. Discussing those is within the scope of this thread.

The reason to divert discussions of the taxation of Treasury accrued market discount at the state level to the other thread is that it already has been discussed extensively in that thread, so discussing it here would be repetitive.

Kevin
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Re: Taxation of Treasury bills, notes and bonds

Post by ofckrupke »

Kevin M wrote: Mon Feb 20, 2023 7:24 pm Maybe the software should do that, but it doesn't, so we must find workarounds. Discussing those is within the scope of this thread.
Great. My own workaround is not to bother with the tax software. I acknowledge that not everyone can do this, and so it's good that what works is being reported here.

It would be nice if tax software worked well enough, without being spoonfed, to use in parallel as a check on my work; but it's not, apparently.
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Re: Verification of OID reported by Vanguard for TIPS

Post by Klewles »

Kevin M wrote: Mon Feb 20, 2023 12:15 pm IRS Pub 1212 specifically states to use the day after the last day of the tax year, which is 1/1/2023 for 2022 returns. So, TD is doing it incorrectly according to the pub.
Yep, TD does it wrong according to Pub 1212. I guess Treasury's right hand doesn't know what it's left hand is doing. :happy Still, for my TD bonds, I report OID as per TD's 1099.
I believe that #Cruncher has said that both ref CPI and index ratio should be rounded to 5 decimal places. If I round the ref CPIs this way, I get the same results as with no rounding. However, if I round index ratios to 5 decimal places, the numbers change slightly.
Yep, so arguably Vanguard is doing it wrong since they don't round index ratios. And Vanguard's monthly calculations introduce a few cents of roundoff error, also wrong. Still, for my Vanguard bonds, I report OID as per Vanguard's 1099.
The CFR Appendix says truncate to 6 and round to 5 for both ref CPI and index ratio. If I do that, I get the same results as just rounding to 5.
"Truncate to 6 then round to 5" is just an unambigous way of specifying what it means to round to 5 places. I.e., calculate the index ratio using long division, stop after 6 decimal places, then round the result to 5 places. If Treasury were challenged on what the value of an index ratio should be, this spec would be easy to explain in court.
... I'd prefer that the reported numbers match the 1099-OID numbers.
Me too, I report what the 1099 says. I hold bonds to maturity, and so far the cumulative OID reported on 1099's is exactly right at maturity, both TD and Vanguard. All we're talking about is tiny differences in year-by-year amounts.
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H&R Block SCHP and NC state taxes

Post by hudson »

H&R Block Deluxe + E-File+ State Tax Software for Windows
SCHP...TIPS ETF...no state taxes

Does the H&R Block software handle "no state taxes" on SCHP (or individual treasuries) or do I need to handle it manually?
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H&R Block SCHP and NC state taxes...RESOLVED

Post by hudson »

I might have found the answer by going back through my return page by page.

Under the state return part of the H&R Block interview:

U.S. Government Interest
We found $XXX of U.S. government interest on you federal return and have subtracted it from your NC income...snip... This applies even if you receive the interest income through a mutual fund or money market that invests in these sources.
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Re: H&R Block SCHP and NC state taxes

Post by Kevin M »

hudson wrote: Tue Feb 21, 2023 8:23 am H&R Block Deluxe + E-File+ State Tax Software for Windows
SCHP...TIPS ETF...no state taxes

Does the H&R Block software handle "no state taxes" on SCHP (or individual treasuries) or do I need to handle it manually?
In the HRB 1099-DIV form, the dividends will appear in box 1a, Ordinary dividends, if imported, or you enter it there from the 1099-DIV provided by the broker. At the bottom, check the box "From US Treasury obligations". On the next screen enter the percent USGO, which I assume is 100% for a TIPS ETF, but your broker should provide this information. This will pass through to the state tax forms as Treasury income, which as you know is exempt from state income tax.
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Re: Taxation of Treasury bills, notes and bonds

Post by hudson »

Thanks again Kevin M !
Last edited by hudson on Tue Feb 21, 2023 3:38 pm, edited 1 time in total.
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Accrued int and ABP adjustments for one 1099-INT using HRB

Post by Kevin M »

I just did the HRB Treasury interest entries for an account that had both amortized bond premium (ABP) and accrued interest, for which we need two 1099-INTs to do both adjustments (you can only do one per 1099-INT).

First, I left the box 3 amount as is, and did the ABP for this one.

Next, I tried to enter 0 in the 1099-INT to do the accrued interest adjustment, but it did not show up on Schedule B.

So, I subtracted the amount of accrued interest from the first 1099-INT, and entered that amount in box 3 of the second 1099-INT, and did the accrued interest adjustment (so this 1099-INT shows 0 net interest). Now both the ABP and acc int adjustments are showing properly on Schedule B.

As we've discussed, you can split the interest up any way you want between the two 1099-INTs, but it felt clean to me to have the interest amount equal the accrued interest amount on the second 1099-INT.

This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return.

Kevin
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Re: Taxation of Treasury bills, notes and bonds

Post by AAA »

This thread has been discussing some esoteric aspects of the taxation of Treasuries. I just want to remind people of something simpler - as rates have gone up significantly in the past year or so, your 2023 1099-INT may in turn show a significant increase over the one for 2022 so you may want to consider that estimated tax payments need to change from what you may have been making in recent years.
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Re: Accrued int and ABP adjustments for one 1099-INT using HRB

Post by HereToLearn »

Kevin M wrote: Tue Feb 21, 2023 2:25 pm I just did the HRB Treasury interest entries for an account that had both amortized bond premium (ABP) and accrued interest, for which we need two 1099-INTs to do both adjustments (you can only do one per 1099-INT).

First, I left the box 3 amount as is, and did the ABP for this one.

Next, I tried to enter 0 in the 1099-INT to do the accrued interest adjustment, but it did not show up on Schedule B.

So, I subtracted the amount of accrued interest from the first 1099-INT, and entered that amount in box 3 of the second 1099-INT, and did the accrued interest adjustment (so this 1099-INT shows 0 net interest). Now both the ABP and acc int adjustments are showing properly on Schedule B.

As we've discussed, you can split the interest up any way you want between the two 1099-INTs, but it felt clean to me to have the interest amount equal the accrued interest amount on the second 1099-INT.

This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return.

Kevin
Question regarding this statement: "This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return."

More of my accrued interest from 2022 is associated with notes that did not pay until early 2023. I assume that I should only include the 2022 accrued interest amount for those notes that paid interest in 2022, and carry forward the balance to be offset against 2023 interest. Is that correct?

Thanks!
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Re: Taxation of Treasury bills, notes and bonds

Post by dual »

Kevin

This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return.
I will be interested to see what the IRS matching program makes of your tax return.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

dual wrote: Tue Feb 21, 2023 5:40 pm Kevin

This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return.
I will be interested to see what the IRS matching program makes of your tax return.
I doubt they check at this level. I used a cpa one year, and he deducted all accrued interest reported paid for the year, regardless of whether or not there were interest payments for every bond in that tax year. No IRS issues, and that was more than 2 years ago.
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Re: Accrued int and ABP adjustments for one 1099-INT using HRB

Post by Kevin M »

HereToLearn wrote: Tue Feb 21, 2023 5:33 pm
Kevin M wrote: Tue Feb 21, 2023 2:25 pm I just did the HRB Treasury interest entries for an account that had both amortized bond premium (ABP) and accrued interest, for which we need two 1099-INTs to do both adjustments (you can only do one per 1099-INT).

First, I left the box 3 amount as is, and did the ABP for this one.

Next, I tried to enter 0 in the 1099-INT to do the accrued interest adjustment, but it did not show up on Schedule B.

So, I subtracted the amount of accrued interest from the first 1099-INT, and entered that amount in box 3 of the second 1099-INT, and did the accrued interest adjustment (so this 1099-INT shows 0 net interest). Now both the ABP and acc int adjustments are showing properly on Schedule B.

As we've discussed, you can split the interest up any way you want between the two 1099-INTs, but it felt clean to me to have the interest amount equal the accrued interest amount on the second 1099-INT.

This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return.

Kevin
Question regarding this statement: "This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return."

More of my accrued interest from 2022 is associated with notes that did not pay until early 2023. I assume that I should only include the 2022 accrued interest amount for those notes that paid interest in 2022, and carry forward the balance to be offset against 2023 interest. Is that correct?

Thanks!
That seems to be the common interpretation of IRS pubs. In the case of the return I mentioned, the amount is small, and I didn't think it was worth it to have to worry about it next year.

In the past when I've had a significant amount of accrued interest with no associated coupon payments, I did as you have described.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Accrued int and ABP adjustments for one 1099-INT using HRB

Post by HereToLearn »

Kevin M wrote: Tue Feb 21, 2023 7:01 pm
HereToLearn wrote: Tue Feb 21, 2023 5:33 pm
Kevin M wrote: Tue Feb 21, 2023 2:25 pm I just did the HRB Treasury interest entries for an account that had both amortized bond premium (ABP) and accrued interest, for which we need two 1099-INTs to do both adjustments (you can only do one per 1099-INT).

First, I left the box 3 amount as is, and did the ABP for this one.

Next, I tried to enter 0 in the 1099-INT to do the accrued interest adjustment, but it did not show up on Schedule B.

So, I subtracted the amount of accrued interest from the first 1099-INT, and entered that amount in box 3 of the second 1099-INT, and did the accrued interest adjustment (so this 1099-INT shows 0 net interest). Now both the ABP and acc int adjustments are showing properly on Schedule B.

As we've discussed, you can split the interest up any way you want between the two 1099-INTs, but it felt clean to me to have the interest amount equal the accrued interest amount on the second 1099-INT.

This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return.

Kevin
Question regarding this statement: "This account had many Treasuries in it (bills, notes/bonds, TIPS). All of them paid interest in 2022 except one. I am including all reported accrued interest on the 2022 return."

More of my accrued interest from 2022 is associated with notes that did not pay until early 2023. I assume that I should only include the 2022 accrued interest amount for those notes that paid interest in 2022, and carry forward the balance to be offset against 2023 interest. Is that correct?

Thanks!
That seems to be the common interpretation of IRS pubs. In the case of the return I mentioned, the amount is small, and I didn't think it was worth it to have to worry about it next year.

In the past when I've had a significant amount of accrued interest with no associated coupon payments, I did as you have described.
Thanks for your help. Just wanted to make sure I was still on the right track.

I agree with you that it probably wouldn't be noticed, but since I have now tracked the 2022 & 2023 amounts, I may as well file the way we think is correct.
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Re: Taxation of Treasury bills, notes and bonds

Post by coachd50 »

This is such an informative thread. Thank you to all who have contributed
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Re: Taxation of Treasury bills, notes and bonds

Post by AAA »

Kevin M wrote: Tue Feb 21, 2023 6:56 pm I doubt they check at this level. I used a cpa one year, and he deducted all accrued interest reported paid for the year, regardless of whether or not there were interest payments for every bond in that tax year. No IRS issues, and that was more than 2 years ago.
I believe that accrued interest is not reported to the IRS, so how could they check it except in an audit?
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

AAA wrote: Wed Feb 22, 2023 9:49 am
Kevin M wrote: Tue Feb 21, 2023 6:56 pm I doubt they check at this level. I used a cpa one year, and he deducted all accrued interest reported paid for the year, regardless of whether or not there were interest payments for every bond in that tax year. No IRS issues, and that was more than 2 years ago.
I believe that accrued interest is not reported to the IRS, so how could they check it except in an audit?
Right. Here's a note in the "Detail for interest income" section of Vanguard's composite 1099:
To provide a complete picture of activity for each investment, we also include here nonreportable transactions such as accrued interest paid on purchases and payment or receipt of nonqualified interest. Other amounts, such as federal, state and foreign tax withheld and investment expenses are shown as negative amounts but do not net against the reportable income totals.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

For the account I've been referencing in my last few posts, there were six pages of OID details for TIPS. I still wanted to calculate OID myself, but I had to take a simpler approach than for the account with only one TIPS in it. I did not calculate OID for each month for each tax lot, as Vanguard does. I just calculated from the settlement date to 1/1/2023 for each tax lot. I did no rounding of ref CPIs or index ratios. Here is the resulting table, including the OID reported for Vanguard for each tax lot:

Image

Note that the tax lot totals were within +/- $0.01 of each other, and the grand totals are $0.04 different, but round to the same dollar value.

The hidden rows above this table are the TIPS transactions from the 2022 transactions imported from Vanguard, along with some columns to calculate or look up. Here are the first few rows with the uninteresting columns hidden:

Image

The formula used to populate columns A through M is:

Code: Select all

=FILTER(JasonTrans!B:M,FIND("INFLATION",JasonTrans!F:F))
(I don't think disclosing a first name in the sheet name is an issue.)

The JasonTrans sheet contains the imported Vanguard download for 2022 transactions. Only TIPS transactions contain "INFLATION" in the Investment Name.

Here are the columns with example formulas in the first (OID) table:
  • Cpn: from investment name, e.g., =MID(E2,FIND("CPN",E2)+4,5)%
  • Maturity: from investment name, e.g., =VALUE(MID(E2,FIND("MTD",E2)+4,10))
  • CUSIP: lookup based on maturity date and coupon, e.g., =FILTER(TIPSref!A:A,TIPSref!D:D=M2,TIPSref!C:C=N2) (Vanguard does not include the CUSIP in the export)
  • Dated date: lookup based on CUSIP, e.g., =VLOOKUP(O2,TIPSref!A:E,5,0)
  • Dated date ref CPI: lookup based on CUSIP, e.g., =VLOOKUP(O2,TIPSref!A:E,5,0)
The formula to populate the first rows of the OID table is this:

Code: Select all

=SORT(QUERY(B2:Q29,"select O,B,G,Q where G>0"),1,1,2,1)
Here are the example formulas to populate the other columns in the OID table:
  • Settle ref CPI: =VLOOKUP(B33,RefCPI!A:C,3,0)
  • Settle IR: =E33/D33
  • Settle adj amt: =$C33*F33
  • 1/1/23 index rato: =$B$31/D33
  • 1/1/23 amt: =$C33*H33
  • OID: =I33-G33
The VG 1099-OID column number are copied from the Vanguard 1099-OID details.

Bottom line is that this is further verification that the Vanguard OID numbers are fine to use.

As a side note, the import from Vanguard to HRB includes a 1099-OID form for each tax lot, so 21 1099-OID forms! It's a bit of a pain to go through each one just to verify it with HRB.

This is similar to the way Vanguard downloads a 1099-DIV for each mutual fund for mutual fund accounts, whereas it downloads a single 1099-DIV for brokerage accounts, with the details in a details section of the 1099.

Kevin
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Re: Taxation of Treasury bills, notes and bonds

Post by Goro »

Hi, thank you for nice info.

Last year, I bought treasury bills and notes on my brokerage account, and this is first year I received 1099 for these treasuries. I saw the interest on 1099-INT.

My question is 1099-B. Is my understanding correct?
If I sold bill/notes before mature, it will generate 1099-B
If I kept bill until mature, it will not generate 1099-B
Even I kept notes until mature, it will generate 1099-B
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Re: Taxation of Treasury bills, notes and bonds

Post by MikeG62 »

nalor511 wrote: Wed Feb 15, 2023 2:02 pm
sdvan wrote: Tue Feb 14, 2023 3:32 pm Can I use a specific example to help understand:

I recently purchased a .75% treasury note that matures on Dec. 31, 2023. I purchased at a discount and the yield to maturity should be 5.09%. I plan to hold this note to maturity.

Based on prior threads, I suspect that the sale will show up as a 2024 sale. So, my 2023 tax implications should just be non-state taxable interest.

The question I am wondering is how the sale proceeds will be handled. Will the proceeds be "interest", a combination of interest and capital gains, or capital gains? Will the proceeds be state tax free in California?

Thanks for helping me understand by using an example.
Similar to this one, I have a TNote that paid coupon interest 12/31/2022, but it did not hit *my* account until 1/3/2023. It's not on my 2022 1099-int(consolidated). Fidelity says it will go on my 2023 1099-int(consolidated).

My 2022 1099 supplemental info has the accrued interest stated, but I obviously cannot deduct $54 accrued.interest from interest of $0. Just to confirm that's the proper thing to happen, shifting this all to TY2023? Thank you
Same for me - might own the same security :-)

What I find odd is that the "accrued interest paid on purchases" (part of the 1099) is not reported to the IRS. This creates a situation where the amounts we report in our tax return will not tie out to the 1099 received by the IRS. :oops:

Seems dumb to me. Either the IRS uses the info they get to crosscheck to the return or they don't. I guess they don't.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Goro wrote: Wed Feb 22, 2023 8:38 pm Hi, thank you for nice info.

Last year, I bought treasury bills and notes on my brokerage account, and this is first year I received 1099 for these treasuries. I saw the interest on 1099-INT.

My question is 1099-B. Is my understanding correct?
If I sold bill/notes before mature, it will generate 1099-B
If I kept bill until mature, it will not generate 1099-B
Even I kept notes until mature, it will generate 1099-B
I sold both notes and bills before maturity in 2019 at Schwab.

Only the notes were on the actual 1099-B, with accrued interest in box f, as has been discussed.

The bills appeared on a year end gain/loss summary not reported to the IRS, with the instruction to report on Form 8949. You must calculate accrued acquisition discount yourself, subtract it from the gain/loss, and manually enter it in a dummy 1099-INT.

Bills that mature appear only on 1099-INT.

Notes that mature appear on 1099-B with market discount in box f.

You can find details by searching this topic for "Schwab 2019".

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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