Accrued Interest on Treasury Auctions

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Dudley
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Accrued Interest on Treasury Auctions

Post by Dudley » Wed Aug 08, 2018 9:25 pm

For tax how does one account for the (sometimes small) accrued interest on purchases at treasury auctions ? Does one subtract it from the interest shown end of year on the 1099-INT or would that figure already have been adjusted for the accrued interest ? Or has it automatically been factored into the final purchase price ? Thanks

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Doc
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Re: Accrued Interest on Treasury Auctions

Post by Doc » Thu Aug 09, 2018 7:10 am

It may be small for auctions but up to almost six months interest if bought on secondary market.
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Gill
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Re: Accrued Interest on Treasury Auctions

Post by Gill » Thu Aug 09, 2018 7:17 am

Subtract it from the interest received on the next payment date.
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Doc
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Re: Accrued Interest on Treasury Auctions

Post by Doc » Thu Aug 09, 2018 8:31 am

It should how up on your tax forms from your broker under "Accrued Interest Paid on Purchases".
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#Cruncher
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Re: Accrued Interest on Treasury Auctions

Post by #Cruncher » Thu Aug 09, 2018 8:59 am

Dudley wrote:
Wed Aug 08, 2018 9:25 pm
Does one subtract it from the interest shown end of year on the 1099-INT or would that figure already have been adjusted for the accrued interest?
It's been a few years since I bought Treasury securities in a taxable account. But the last time I did, the broker did not deduct the accrued interest from the amount reported on the 1099-INT (line 3 Interest on U.S. Savings Bonds and Treas. Obligations). It was listed in the supplemental pages that came with the 1099 package. I just added a separate line to Schedule B with a negative number for the accrued interest. [1]

To illustrate, assume you purchased $10,000 face value at the 9-Year 10-Month Note auction 4/11/2018. If you have no other interest income for 2018, you should prepare your Schedule B to reflect the following:

Code: Select all

137.50  interest paid 8/15/18 = 10000 * 2.75% / 2
(45.58) accrued interest      = 10 * 4.55801 [2]
------
 91.92  net interest on Schedule B [3]
Dudley in same post wrote: Or has it automatically been factored into the final purchase price?
I'm not sure it this is what you're getting at, Dudley, but accrued interest should not be included in cost basis the way something like commissions would be. It should be taken as a credit in the year of the purchase as explained above.

Doc wrote:
Thu Aug 09, 2018 7:10 am
[accrued interest can be] up to almost six months interest if bought on secondary market.
Correct. It can also be up to 4-1/2 months at some TIPS auctions. For example at the 29-Year 8-Month TIPS auction 6/21/2018 the accrued interest covered 2/15/2018 to 6/29/2018.

Gill wrote:
Thu Aug 09, 2018 7:17 am
Subtract it from the interest received on the next payment date.
This raises an interesting question, Gil. What if the bond's first interest payment isn't until the following year? I would still take the accrued interest in the year of the purchase. But what if you have nothing at all on any 1099-INTs to apply it against? I would sitll try to take the credit in the purchase year. But if your tax software won't handle it or won't allow a negative number for total interest, then just wait and deduct it the following tax year.

  1. As I recall TurboTax has a check box when entering 1099-INT data that allows one to enter accrued interest in a separate dialog. It will add it on a separate line on the Schedule B.
  2. The $4.55801 appears on the auction results PDF file. It can also be calculated as follows:

    Code: Select all

    181       = days in interest period 2/15/2018 to 8/15/2018
     60       = days from 2/15/2018 to 4/16/2018 issue date
     13.75    = semi-annual interest per $1,000 = 1000 * 2.75% / 2
      4.55801 = accrued interest                = 13.75 * (60 / 181)
  3. Enter the net amount ($91.92 in the example) in the Subtractions from Federal Income section of your state tax return.

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Doc
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Re: Accrued Interest on Treasury Auctions

Post by Doc » Thu Aug 09, 2018 9:15 am

#Cruncher wrote:
Thu Aug 09, 2018 8:59 am
It's been a few years since I bought Treasury securities in a taxable account. But the last time I did, the broker did not deduct the accrued interest from the amount reported on the 1099-INT (line 3 Interest on U.S. Savings Bonds and Treas. Obligations). It was listed in the supplemental pages that came with the 1099 package. I just added a separate line to Schedule B with a negative number for the accrued interest.
Right, I was purposely vague by writing "tax forms" not 1099-INT. You have to make the adjustments yourself. #Cruncher is correct that TurboTax has a mechanism for making any adjustment(s).
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

Dudley
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Re: Accrued Interest on Treasury Auctions

Post by Dudley » Thu Aug 09, 2018 7:07 pm

many thanks all, your responses have been helpful. regards

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