Taxation of Treasury bills, notes and bonds

[CrisisAverted]

My answers.

1. No. The issue date does not matter. The tax reporting is no more complicated if the bill matures in the year of purchase or the year after purchase. The longest maturity bill is 52 weeks, which is 364 days, so all bills have a maturity of less than one year.

2. CrisisAverted answer is correct.

3. CrisisAverted answer is correct.

4. Accrued interest only applies to Treasuries that pay coupon interest. Bills don't have coupon payments--all interest is in the form of accrued acquisition discount (which is the correct term for bills).

Kevin

Thanks, this is very reassuring!

To confirm, is "accrued acquisition discount" handled any different than just a simple entry in the 1099-INT?

[CrisisAverted]

Yes all t-bills are short-term securities for tax purposes.
1. No and yes.
2. 1099-INT box 3 will include your t-bills, and income in this box is exempt from state/local taxes. You don't mention your broker but Fidelity has supplemental information which shows the details.
3. Yes (see 2)
4. No; there no accrued interest for t-bills because they pay no coupon interest. **EDITED, thanks to Kevin for clarifying this answer**

Thank you! I am happy to hear that #4 now appears to be simplified!

[Kevin M]

My answers.

1. No. The issue date does not matter. The tax reporting is no more complicated if the bill matures in the year of purchase or the year after purchase. The longest maturity bill is 52 weeks, which is 364 days, so all bills have a maturity of less than one year.

2. CrisisAverted answer is correct.

3. CrisisAverted answer is correct.

4. Accrued interest only applies to Treasuries that pay coupon interest. Bills don't have coupon payments--all interest is in the form of accrued acquisition discount (which is the correct term for bills).

Kevin

Thanks, this is very reassuring!

To confirm, is "accrued acquisition discount" handled any different than just a simple entry in the 1099-INT?

Only if you sell before maturity, in which case everything is shown in a supplemental section of the composite 1099. In that case, there is extra work, which has been discussed previously (multiple times I think).

[Bogle-007]

Is it possible to have your brokerage, such as Fidelity, withhold federal taxes from the interest?

[exodusing]

I'm considering purchasing some TIPS in taxable and want to make sure I understand. They would be purchased at Vanguard and I use TurboTax.

If I'm reading correctly, Vanguard's 1099 (actual or important) does most the work, but you have to track and adjust for accrued interest.

Cash income, inflation adjustment and any OID are taxable at ordinary rates for federal tax and are exempt from state taxation.

[kalarama]

To defer some taxes to 2024, I would like to buy t-bills and notes on secondary market at Fidelity maturing in early 2024 and plan to hold them to maturity.

For the bills, I fully understand that I will realize the gain (as interest) in the year of maturity (2024 in this case) and will have nothing taxable in 2023 as I will hold to maturity. No questions here.

For the notes, I am trying to understand taxation between 2023 and 2024. For the coupons, there will be at least 1 more coupon in 2023 which will be taxable in 2023 (adjusted for accrued interest paid at purchase) and one final coupon taxed in 2024. If I hold the note to maturity in 2024, will the rest of the ‘gain’ be taxed in 2024? Or will some of that be taxable in 2023? Reading this thread, it is not clear to me. If it's easier, I can provide a specific example to run through using actual numbers for a specific purchase on Fidelity.

My main goal is to defer taxes to 2024. For t-bills, that is fully achieved. But since notes are yielding higher than bills in Q1 2024, I would like to buy some notes as well, but only if I do not realize any taxes for them in 2023 (other than 2023 coupons).

Thanks for any input.

[FactualFran]

For the notes, I am trying to understand taxation between 2023 and 2024. For the coupons, there will be at least 1 more coupon in 2023 which will be taxable in 2023 (adjusted for accrued interest paid at purchase) and one final coupon taxed in 2024. If I hold the note to maturity in 2024, will the rest of the ‘gain’ be taxed in 2024? Or will some of that be taxable in 2023? Reading this thread, it is not clear to me. If it's easier, I can provide a specific example to run through using actual numbers for a specific purchase on Fidelity.

There could be income tax for 2023 on other than interest payments in 2023 of a Treasury Note purchased in 2023 that matures in 2024. It depends on the actual numbers and which of the various income tax options the brokerage is using, either by default or because of a choice that you made. It would be easier if you provided specific values for the settlement date, maturity date, and purchase price per $100 par.

[Kevin M]

For the notes, I am trying to understand taxation between 2023 and 2024. For the coupons, there will be at least 1 more coupon in 2023 which will be taxable in 2023 (adjusted for accrued interest paid at purchase) and one final coupon taxed in 2024. If I hold the note to maturity in 2024, will the rest of the ‘gain’ be taxed in 2024? Or will some of that be taxable in 2023? Reading this thread, it is not clear to me. If it's easier, I can provide a specific example to run through using actual numbers for a specific purchase on Fidelity.

There could be income tax for 2023 on other than interest payments in 2023 of a Treasury Note purchased in 2023 that matures in 2024. It depends on the actual numbers and which of the various income tax options the brokerage is using, either by default or because of a choice that you made. It would be easier if you provided specific values for the settlement date, maturity date, and purchase price per $100 par.

In my experience, the default at Fidelity is to report accrued market discount on 1099-B in column f at maturity (from memory, I'm not going to research this again, as I've done it many times in this thread--you can search to find more). Unless you have elected to pay tax on accrued market discount each year, the tax will be at maturity.

[Kevin M]

Is it possible to have your brokerage, such as Fidelity, withhold federal taxes from the interest?

I don't think so, but you should just ask Fidelity.

[Kevin M]

I'm considering purchasing some TIPS in taxable and want to make sure I understand. They would be purchased at Vanguard and I use TurboTax.

If I'm reading correctly, Vanguard's 1099 (actual or important) does most the work, but you have to track and adjust for accrued interest.

Cash income, inflation adjustment and any OID are taxable at ordinary rates for federal tax and are exempt from state taxation.

Pretty much correct. The inflation adjustment is reported as OID, so these are one and the same.

The only accrued interest to deal with is what you pay when you buy, and you just deal with that either in the tax year you buy (which I do if possible), or in the tax year you receive your first coupon payment.

[Doc]

I have a Treasury note maturing in a few weeks that was bought on the secondary market at a small premium over par and with accrued interest.

How do I record the maturing transaction for tax purposes?

[ofckrupke]

I'm considering purchasing some TIPS in taxable and want to make sure I understand. They would be purchased at Vanguard and I use TurboTax.

If I'm reading correctly, Vanguard's 1099 (actual or important) does most the work, but you have to track and adjust for accrued interest.

Cash income, inflation adjustment and any OID are taxable at ordinary rates for federal tax and are exempt from state taxation.

Pretty much correct. The inflation adjustment is reported as OID, so these are one and the same.

The only accrued interest to deal with is what you pay when you buy, and you just deal with that either in the tax year you buy (which I do if possible), or in the tax year you receive your first coupon payment.

If bought on secondary market there will likely be either
a) annual adjustments to interest income for premium amortization
xor
b) (generally upon disposition/maturity) an accounting of accrued market discount xor, if de mimimis, a capital gain.

The above are supposed to be incorporated into the broker's OID reporting; about whether it will be both accurate and transparently digested by tax software, my confidence is not high (Kevin's detailed comparison upthread of his vs. Vanguard's OID calculations notwithstanding). IMO it's worth a look at the section on "figuring" OID for Inflation-Indexed Debt Instruments in publication 1212, to see what's involved if the broker OID reporting is suspect.

[exodusing]

I'm considering purchasing some TIPS in taxable and want to make sure I understand. They would be purchased at Vanguard and I use TurboTax.

If I'm reading correctly, Vanguard's 1099 (actual or important) does most the work, but you have to track and adjust for accrued interest.

Cash income, inflation adjustment and any OID are taxable at ordinary rates for federal tax and are exempt from state taxation.

Pretty much correct. The inflation adjustment is reported as OID, so these are one and the same.

The only accrued interest to deal with is what you pay when you buy, and you just deal with that either in the tax year you buy (which I do if possible), or in the tax year you receive your first coupon payment.

Thank you.

#cruncher, you and others have said TIPS are best in an IRA or other tax-advantaged account, since the tax reporting is simpler. The reporting may be simpler in that case, but the above does not sound at all complicated, at least for someone like me who buys on the secondary market and intends to hold to maturity. Am I misinterpreting?

Here's a #cruncher post on tax reporting for TIPS in taxable: viewtopic.php?p=1849197#p1849197 I believe we've covered the issues he mentions (other than regarding sales, which is obviously not relevant if holding to maturity). Posters in the thread he links suggest reporting is easy, e.g., viewtopic.php?p=2683617#p2683617

[kalarama]

In my experience, the default at Fidelity is to report accrued market discount on 1099-B in column f at maturity (from memory, I'm not going to research this again, as I've done it many times in this thread--you can search to find more). Unless you have elected to pay tax on accrued market discount each year, the tax will be at maturity.

I have tried to keep with this thread and don't recall reading specifically about Fidelity's default behavior wrt taxes for notes. Regardless, I have not made a change to the default election at Fidelity. I just talked to a Fidelity fixed income specialist and they informed me that the default behavior is for accretion of market discount for notes to be done at maturity/disposition, not annually. This is the behavior I prefer, so yay!

There could be income tax for 2023 on other than interest payments in 2023 of a Treasury Note purchased in 2023 that matures in 2024. It depends on the actual numbers and which of the various income tax options the brokerage is using, either by default or because of a choice that you made. It would be easier if you provided specific values for the settlement date, maturity date, and purchase price per $100 par.

Yesterday, I bought a sample 01/15/2024 note. I will receive a coupon on 7/15/23 and will adjust for the accrued interest paid on 2023 return. In 2024, I will receive final coupon and final payout of 10,000 at maturity. Given above comment that Fidelity does not accrete annually by default, the ~300 'gain' would be on 2024 1099.

CUSIP 91282CBE0
Coupon 0.125%
Shares + 10,000.000
Price 96.808
Amount -$9,685.32
Interest $4.52
Settlement Date 05/26/2023

[Kevin M]

I'm considering purchasing some TIPS in taxable and want to make sure I understand. They would be purchased at Vanguard and I use TurboTax.

If I'm reading correctly, Vanguard's 1099 (actual or important) does most the work, but you have to track and adjust for accrued interest.

Cash income, inflation adjustment and any OID are taxable at ordinary rates for federal tax and are exempt from state taxation.

Pretty much correct. The inflation adjustment is reported as OID, so these are one and the same.

The only accrued interest to deal with is what you pay when you buy, and you just deal with that either in the tax year you buy (which I do if possible), or in the tax year you receive your first coupon payment.

Thank you.

#cruncher, you and others have said TIPS are best in an IRA or other tax-advantaged account, since the tax reporting is simpler. The reporting may be simpler in that case, but the above does not sound at all complicated, at least for someone like me who buys on the secondary market and intends to hold to maturity. Am I misinterpreting?

Here's a #cruncher post on tax reporting for TIPS in taxable: viewtopic.php?p=1849197#p1849197 I believe we've covered the issues he mentions (other than regarding sales, which is obviously not relevant if holding to maturity). Posters in the thread he links suggest reporting is easy, e.g., viewtopic.php?p=2683617#p2683617

Not checking the post, but IIRC, his issue was regarding incorrect OID reporting by the broker, so needing to calculate it yourself. As I have shared, Vanguard's OID reporting was accurate, and I have no reason to think Fidelity's would not be. Perhaps brokers have gotten better at this since #Cruncher's experience?

I found the tax prep with HRB to be quite straightforward.

[Kevin M]

I have a Treasury note maturing in a few weeks that was bought on the secondary market at a small premium over par and with accrued interest.

How do I record the maturing transaction for tax purposes?

Hey Doc,

1. See the OP--it covers the basics.

2. Search this thread for "amortized bond premium". The very first hit provides the details on your choices and how to report it.

Bottom line, the ABP will be reported on the 1099-INT but you must deal with the accrued interest manually. With HRB, you can only do one or the other adjustment for a single 1099-INT, so I do the ABP adjustment for the original 1099-INT, then create a dummy 1099-INT to do the accrued interest adjustment. I vaguely recall that others have reported that TT lets you do both adjustments on the original 1099-INT--u probably can find that too if you search the thread.

[FactualFran]

Yesterday, I bought a sample 01/15/2024 note. I will receive a coupon on 7/15/23 and will adjust for the accrued interest paid on 2023 return. In 2024, I will receive final coupon and final payout of 10,000 at maturity. Given above comment that Fidelity does not accrete annually by default, the ~300 'gain' would be on 2024 1099.

CUSIP 91282CBE0
Coupon 0.125%
Shares + 10,000.000
Price 96.808
Amount -$9,685.32
Interest $4.52
Settlement Date 05/26/2023

That takes care of the income taxation issues about that purchase.

[MisterMister]

I'm considering purchasing some TIPS in taxable and want to make sure I understand. They would be purchased at Vanguard and I use TurboTax.

If I'm reading correctly, Vanguard's 1099 (actual or important) does most the work, but you have to track and adjust for accrued interest.

Cash income, inflation adjustment and any OID are taxable at ordinary rates for federal tax and are exempt from state taxation.

Pretty much correct. The inflation adjustment is reported as OID, so these are one and the same.

The only accrued interest to deal with is what you pay when you buy, and you just deal with that either in the tax year you buy (which I do if possible), or in the tax year you receive your first coupon payment.

Thank you.

#cruncher, you and others have said TIPS are best in an IRA or other tax-advantaged account, since the tax reporting is simpler. The reporting may be simpler in that case, but the above does not sound at all complicated, at least for someone like me who buys on the secondary market and intends to hold to maturity. Am I misinterpreting?

Here's a #cruncher post on tax reporting for TIPS in taxable: viewtopic.php?p=1849197#p1849197 I believe we've covered the issues he mentions (other than regarding sales, which is obviously not relevant if holding to maturity). Posters in the thread he links suggest reporting is easy, e.g., viewtopic.php?p=2683617#p2683617

Not checking the post, but IIRC, his issue was regarding incorrect OID reporting by the broker, so needing to calculate it yourself. As I have shared, Vanguard's OID reporting was accurate, and I have no reason to think Fidelity's would not be. Perhaps brokers have gotten better at this since #Cruncher's experience?

I found the tax prep with HRB to be quite straightforward.

I can confirm that Fidelity's 1099s in 2022 were correct with respect to OID reporting for the 3 TIPs positions I held. HRB imported those 1099s fine, and tax completion was also straightforward. Adjustments were the necessary for accrued interest and ABP but methods for that were previously discussed in this thread and those, too, were simple.

[Bogle-007]

Is it possible to have your brokerage, such as Fidelity, withhold federal taxes from the interest?

I don't think so, but you should just ask Fidelity.

Say you have a large amount of treasury interest income that will post in April and November of this year. If you want to pay estimated federal taxes, are you supposed to make the corresponding 1040ES payments in the 2nd and 4th quarters?

[Kevin M]

Is it possible to have your brokerage, such as Fidelity, withhold federal taxes from the interest?

I don't think so, but you should just ask Fidelity.

Say you have a large amount of treasury interest income that will post in April and November of this year. If you want to pay estimated federal taxes, are you supposed to make the corresponding 1040ES payments in the 2nd and 4th quarters?

Tax prep is simpler is you make quarterly payments in equal installments, or have it withheld from pay, SS, or RMD (best options). It's more complicated, but you can calculate any penalty by matching up income with estimated tax payments by quarter, in which case, paying in the quarter of the income, or before, is the way to go.