Taxation of Treasury bills, notes and bonds

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ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

I agree with Artsdoctor, especially for such a small amount.

Pub 550 explains how to make the adjustment on Sch B (see last paragraph on pg 26 in 2023 edition). Sycamore's Aug 23 post covers how to make this adjustment in TurboTax:
sycamore wrote: Fri Aug 23, 2024 5:06 pmWhat's missing is the accrued interest I paid to the seller when I first bought the bond. This does not show up in the official "1099-INT" document; there are no boxes for it. Schwab happens to include that information later in the "Consolidated 1099" document (many/most brokerages do the same.) It's in a section "Accrued Interest Paid on Purchases"

When I entered the 1099-INT into TT, I entered the regular boxes as-is, and after clicking Continue button, I checked the box "We need to adjust the taxable amount." I entered the adjustment value (accrued interest paid by me), and for "Reason for Adjustment" I selected "My accrued interest is included in this Form 1099-INT."

This is the key for TT to add a line to Schedule B, Part I. it says "Accrued Interest" and the amount is negative (accrued interest paid to me).
No one commented on this so I assume it's correct (I don't use tax software). A related discussion on Intuit's forum similarly describes this adjustment (although the discussion gets sidetracked into savings bond interest): Where do i enter the accrued interest paid on bonds?
FactualFran
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Re: Taxation of Treasury bills, notes and bonds

Post by FactualFran »

GoldenBear17 wrote: Fri Aug 30, 2024 4:19 pm I bought a 2 year T-Note that settles in a few days. It was bought at auction and was not a re-opening. Yet it had just under $2 accrued interest. What exactly do I do with this accrued interest on taxes? My understanding is that you somehow subtract it on the taxes from your interest earned. However, this note won't pay any interest until 2025. So does that mean I have to wait until my 2025 tax return to subtract this accrued interest I paid against my interest earned?
Reporting it on an income tax return for 2025 is implied by the following quote from page 26 of IRS Publication 550 for 2023.
Accrued interest on bonds. 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.
Unless you receive a 2024 1099-INT with interest paid on that bond, you should not report the accrued interest on your 2024 income tax return.

I do not know of any law, regulation, ruling, or IRS Publication that indicates that accrued interest paid on a bond can be used as an adjustment to interest income from a source other than the bond on which accrued interest was paid.
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Artsdoctor
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Re: Taxation of Treasury bills, notes and bonds

Post by Artsdoctor »

^ As usual, FactualFran is correct. If you have accrued interest on a particular note or bond, that accrued interest should be used to offset the next coupon interest payment. If that occurs the following year, you do have to keep track of that accrued interest because it will not be on your next year's 1099-INT. It also should be noted that accrued interest, while noted on your 1099-INT, is not reported to the IRS. In practice, the investor will receive a 1099-INT listing "Interest on US Savings Bonds and Treasury obligations" (reported to the IRS); under that, the 1099-INT will also list "Taxable accrued Treasury interest paid" (not reported to the IRS). Most investors would most likely enter both amounts into tax software but teasing out where any accrued interest belongs to which coupon is the right thing to do.
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sycamore
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Re: Taxation of Treasury bills, notes and bonds

Post by sycamore »

ginahoy wrote: Fri Aug 30, 2024 9:12 pm I agree with Artsdoctor, especially for such a small amount.

Pub 550 explains how to make the adjustment on Sch B (see last paragraph on pg 26 in 2023 edition). Sycamore's Aug 23 post covers how to make this adjustment in TurboTax:
sycamore wrote: Fri Aug 23, 2024 5:06 pmWhat's missing is the accrued interest I paid to the seller when I first bought the bond. This does not show up in the official "1099-INT" document; there are no boxes for it. Schwab happens to include that information later in the "Consolidated 1099" document (many/most brokerages do the same.) It's in a section "Accrued Interest Paid on Purchases"

When I entered the 1099-INT into TT, I entered the regular boxes as-is, and after clicking Continue button, I checked the box "We need to adjust the taxable amount." I entered the adjustment value (accrued interest paid by me), and for "Reason for Adjustment" I selected "My accrued interest is included in this Form 1099-INT."

This is the key for TT to add a line to Schedule B, Part I. it says "Accrued Interest" and the amount is negative (accrued interest paid to me).
No one commented on this so I assume it's correct (I don't use tax software). A related discussion on Intuit's forum similarly describes this adjustment (although the discussion gets sidetracked into savings bond interest): Where do i enter the accrued interest paid on bonds?
This was also discussed previously in another post of this same thread. See cas' post on two complications related to accrued interest paid.
Jaylat
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Re: Taxation of Treasury bills, notes and bonds

Post by Jaylat »

Kevin M wrote: Thu Jun 06, 2024 2:41 pm
Jaylat wrote: Thu Jun 06, 2024 2:10 pm Here you go:
<snip>
Can you share the spreadsheet, or a version of it? I can't comment much without seeing the actual spreadsheet. Please PM me if you'd rather take this offline.

Thanks.
I'd like for you to follow up on this. As you recall, you asked me to put together a spreadsheet to show my calculations regarding how the TIPS coupon can cover taxes on OID income. That spreadsheet was posted at this link, and the original sent to you by PM:

viewtopic.php?p=7900032#p7900032
InvisibleAerobar
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Re: Taxation of Treasury bills, notes and bonds

Post by InvisibleAerobar »

Quick question on implication of the de minimis rule.

Say a $100 par value treasury was purchased for $99, due to mature in five years ($99 greater than the de minimis set point of $98.75 for a bond maturing in five years). The $1 at the federal level is then taxed as capital gains.

Does the save hold for state level? Specifically, most states don't tax AMD on treasuries. However, if the characterization of this $1 gain on maturity were to be deemed capital gain, does this represent a backdoor way of taxing the gain?
FactualFran
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Re: Taxation of Treasury bills, notes and bonds

Post by FactualFran »

InvisibleAerobar wrote: Sat Oct 26, 2024 2:51 pm Quick question on implication of the de minimis rule.

Say a $100 par value treasury was purchased for $99, due to mature in five years ($99 greater than the de minimis set point of $98.75 for a bond maturing in five years). The $1 at the federal level is then taxed as capital gains.

Does the save hold for state level? Specifically, most states don't tax AMD on treasuries. However, if the characterization of this $1 gain on maturity were to be deemed capital gain, does this represent a backdoor way of taxing the gain?
If a state government treats as capital gains what the federal government treats as capital gains, without any state-specific adjustments, then a de minimis discount is taxed by the state as a capital gain. Some possible adjustments a state can make is to not tax capital gains on US government bonds or to not use the de minimis treatment used by the federal government.
InvisibleAerobar
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Re: Taxation of Treasury bills, notes and bonds

Post by InvisibleAerobar »

Thanks for the explanation.
AlmstRtrd
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Re: Taxation of Treasury bills, notes and bonds

Post by AlmstRtrd »

I am fairly sure this has been answered upthread but don't want to read through 25 pages...

Fidelity's YTD tax activity page is showing some LTCG on maturing Treasuries in my wife's taxable account. These LTCG are mostly coming from zero coupon or low yielding Treasuries that were held to maturity. Come tax time will these gains actually be treated as capital gains or as interest income? In other words, will Fidelity included them on form 1099-INT or form 1099-B?

Just trying to figure out if going forward she should be buying T-Notes on the secondary market that mature in just over a year as LTCG generally get more favorable tax treatment.
FactualFran
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Re: Taxation of Treasury bills, notes and bonds

Post by FactualFran »

AlmstRtrd wrote: Wed Dec 25, 2024 12:46 pm Just trying to figure out if going forward she should be buying T-Notes on the secondary market that mature in just over a year as LTCG generally get more favorable tax treatment.
Whether the maturity proceeds minus the purchase price is taxed as capital gain or interest depends on details.

If the discount is less than one-fourth of 1% (0.0025) of the redemption value at maturity multiplied by the number of full years from acquisition to maturity, then the discount is classified as De Minimis and the discount amount is taxed as a capital gain for the year that the T-Note matures. Otherwise, the discount amount is taxed as income. There are possible options whether the entire discount amount is taxed for the year that the T-Note matures or the discount amount is taxed over the years the T-Note was owned.
ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

If you purchase a low interest bond on the secondary market at a significant discount (because coupon is low) and hold until maturity, the gain taxed as ordinary income.
Last edited by ginahoy on Thu Dec 26, 2024 9:21 am, edited 1 time in total.
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Richard1580
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Re: Taxation of Treasury bills, notes and bonds

Post by Richard1580 »

ginahoy wrote: Wed Dec 25, 2024 3:10 pm If you purchase a low interest bond on the secondary market at a significant discount (because coupon is low) and hold until maturity, the gain taxed as ordinary income, right?
That is my understanding. It makes no sense to me, but that seems to be the way it works.
"The quest is the quest."
ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

Richard1580 wrote: Wed Dec 25, 2024 6:21 pmThat is my understanding. It makes no sense to me, but that seems to be the way it works.
The idea is this: the difference between the discounted price and the face value of the bond is purely an interest rate play if held to maturity.

I'm not familar with how Fidelity tracks treasury bond investments but there could be an unrealized capital gain if the bond's market value tracks ahead of face value minus accrued market discount... i.e., the value consistent with the YTM at acquisition. Those gains would only be realized if the bond is sold prior to maturity. In any case, there's no taxable income (other than coupon payments) until the bond is sold or matures, although bond holders may opt to pay tax annually on the ratable accrued interest (this election applies to all bonds until revoked).
AlmstRtrd
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Re: Taxation of Treasury bills, notes and bonds

Post by AlmstRtrd »

FactualFran wrote: Wed Dec 25, 2024 2:31 pm
AlmstRtrd wrote: Wed Dec 25, 2024 12:46 pm Just trying to figure out if going forward she should be buying T-Notes on the secondary market that mature in just over a year as LTCG generally get more favorable tax treatment.
Whether the maturity proceeds minus the purchase price is taxed as capital gain or interest depends on details.

If the discount is less than one-fourth of 1% (0.0025) of the redemption value at maturity multiplied by the number of full years from acquisition to maturity, then the discount is classified as De Minimis and the discount amount is taxed as a capital gain for the year that the T-Note matures. Otherwise, the discount amount is taxed as income. There are possible options whether the entire discount amount is taxed for the year that the T-Note matures or the discount amount is taxed over the years the T-Note was owned.
Thanks for your help, FactualFran! Alas, what I think I need is a real world example. From Fidelity's fixed income page, here is a low-coupon note that matures 1/31/26:

UNITED STATES TREAS SER U-2026 0.37500% 01/31/2026 NTS NOTE
Ask Price: 95.833000
Ask Yield: 4.312000
Third Party Price: 95.809

If I purchased one note today and held it to maturity, I would:

Scenario #1 - get two small coupon payments (1099-INT for 2025) that total 0.375% per note and about $416.70 (1099-B for 2026) in long-term capital gains. Or...

Scenario #2: owe some tax on imputed interest for the 2025 tax year even if I held until maturity on 1/31/26.

I think it's the latter but this is essentially what I am trying to understand.
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Artsdoctor
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Re: Taxation of Treasury bills, notes and bonds

Post by Artsdoctor »

^ Not always straightforward. Some notes have an embedded OID. But the concept would be that the discount is counted as income at the federal level, as are the coupons. What happens at the state level may not always be straightforward so you'll need to be familiar with how your state deals with this.

Selling a note on the secondary creates an added level of complexity so I would not buy a note on the secondary market with the possibility of selling it before maturity unless you're familiar with the taxation rules.
ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

AlmstRtrd wrote: Thu Dec 26, 2024 6:39 am here is a low-coupon note that matures 1/31/26:

UNITED STATES TREAS SER U-2026 0.37500% 01/31/2026 NTS NOTE
Ask Price: 95.833000
Ask Yield: 4.312000
Third Party Price: 95.809

If I purchased one note today and held it to maturity, I would:

Scenario #1 - get two small coupon payments (1099-INT for 2025) that total 0.375% per note and about $416.70 (1099-B for 2026) in long-term capital gains. Or...

Scenario #2: owe some tax on imputed interest for the 2025 tax year even if I held until maturity on 1/31/26.

I think it's the latter but this is essentially what I am trying to understand.
Read my last two posts. If you hold to maturity you'll only owe taxes on the coupon payments for 2025, and the $416.70 gain will be taxed as ordinary income for 2026 (i.e., that amount flows through to Sch B, along with final coupon payment). Keep in mind that assets are only subject to capital gains treatment when they're sold or exchanged. A maturity redemption is not a sale.

When you purchase a bond on the secondary market, typically between coupon dates, there's one further complication. In your example, you'll pay the seller their share of the next coupon payment (through date of sale) since you'll receive the full coupon on Jan 31, such as it is. You would then report both 2025 coupon payments and subtract the accrued interest paid to the seller on your 2025 Schedule B. Publication 550 explains how to do this in last paragraph on page 26.
AlmstRtrd
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Re: Taxation of Treasury bills, notes and bonds

Post by AlmstRtrd »

Got it now, ginahoy. Thank you so much for the clear explanation. Much appreciated!!
ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

AlmstRtrd wrote: Thu Dec 26, 2024 11:29 amGot it now, ginahoy. Thank you so much for the clear explanation. Much appreciated!!
You're welcome. To Artsdoctor's point (and thus much of this discussion thread), taxation can get crazy complicated when you sell bonds on the secondary market.
FactualFran
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Re: Taxation of Treasury bills, notes and bonds

Post by FactualFran »

AlmstRtrd wrote: Thu Dec 26, 2024 6:39 am Thanks for your help, FactualFran! Alas, what I think I need is a real world example. From Fidelity's fixed income page, here is a low-coupon note that matures 1/31/26:

UNITED STATES TREAS SER U-2026 0.37500% 01/31/2026 NTS NOTE
Ask Price: 95.833000
Ask Yield: 4.312000
Third Party Price: 95.809

If I purchased one note today and held it to maturity, I would:

Scenario #1 - get two small coupon payments (1099-INT for 2025) that total 0.375% per note and about $416.70 (1099-B for 2026) in long-term capital gains. Or...

Scenario #2: owe some tax on imputed interest for the 2025 tax year even if I held until maturity on 1/31/26.

I think it's the latter but this is essentially what I am trying to understand.
You will also get a coupon payment at maturity, with the amount included in a Form 1099-INT for 2026. Because the discount amount is higher than the De Minimis limit, the discount will be taxed as income, not as capital gain.

You can choose whether to report the discount of $416.70 on the income tax return for the year of maturity (2016) or spread reporting the discount over the income tax returns for the years you hold the T-Note. With the option to spread the discount over multiple years, you need to use a method the IRS allows. Since about 2016, brokerages have been responsible for doing the calculation and including the amount to be reported each year on a Form 1099. You need to tell the brokerage whether to use the option to spread the discount over multiple years.
gavinsiu
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Re: Taxation of Treasury bills, notes and bonds

Post by gavinsiu »

A question on taxation of Tbill and TIPS after treading through the various post. So I purchased a bunch of T-Bills on the primary market and then some TIPS on the secondary market.
  1. Can I assume that Tbill are tax upon maturity? So If purchase a TBill in Nov and it matures next year, it's going to be taxable next year? I am thinking that this is correct since it would show up in 1099-INT but wanted to make sure.
  2. On the 1099 consolidated is an entry that said "Accrued Interest Paid on Purchases". I am thinking that this is the interest accursed to the seller because I purchased on the secondary market. The TIPS were purchased around April or before and therefore has had a coupon payment or two since (TIPS pay every 6 months).
  3. The 1099 Shows a fee which appears to be a ATM fee reimbursement, I assume this has nothing to do with Tbill or TIPS or taxes in general?
So to enter this into HR Block software, I have to create two 1099-Int entries, one for the 1099-int and the other for 1099-OID?

For the OID, I would select the option "Brought or sold this bond between interest payments" and then enter the "accused interest paid on the purchase"?

Anything I might be missing?
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Artsdoctor
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Re: Taxation of Treasury bills, notes and bonds

Post by Artsdoctor »

gavinsiu wrote: Sat Jan 25, 2025 7:40 pm A question on taxation of Tbill and TIPS after treading through the various post. So I purchased a bunch of T-Bills on the primary market and then some TIPS on the secondary market.
  1. Can I assume that Tbill are tax upon maturity? So If purchase a TBill in Nov and it matures next year, it's going to be taxable next year? I am thinking that this is correct since it would show up in 1099-INT but wanted to make sure.
  2. On the 1099 consolidated is an entry that said "Accrued Interest Paid on Purchases". I am thinking that this is the interest accursed to the seller because I purchased on the secondary market. The TIPS were purchased around April or before and therefore has had a coupon payment or two since (TIPS pay every 6 months).
  3. The 1099 Shows a fee which appears to be a ATM fee reimbursement, I assume this has nothing to do with Tbill or TIPS or taxes in general?
So to enter this into HR Block software, I have to create two 1099-Int entries, one for the 1099-int and the other for 1099-OID?

For the OID, I would select the option "Brought or sold this bond between interest payments" and then enter the "accused interest paid on the purchase"?

Anything I might be missing?
Let's take your two questions and address them individually. First, the T-bills: T-bills are always 12 months or less, so can you clarify purchasing something in November on the primary market and maturing in 2026? If you purchased something at auction in November 2024 and it matures in 2026, it's not a T-bill but a T-note. If you provide the full information, we can then tell you about the taxation you'd expect.
gavinsiu
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Re: Taxation of Treasury bills, notes and bonds

Post by gavinsiu »

Artsdoctor wrote: Mon Jan 27, 2025 10:16 am
gavinsiu wrote: Sat Jan 25, 2025 7:40 pm A question on taxation of Tbill and TIPS after treading through the various post. So I purchased a bunch of T-Bills on the primary market and then some TIPS on the secondary market.
  1. Can I assume that Tbill are tax upon maturity? So If purchase a TBill in Nov and it matures next year, it's going to be taxable next year? I am thinking that this is correct since it would show up in 1099-INT but wanted to make sure.
  2. On the 1099 consolidated is an entry that said "Accrued Interest Paid on Purchases". I am thinking that this is the interest accursed to the seller because I purchased on the secondary market. The TIPS were purchased around April or before and therefore has had a coupon payment or two since (TIPS pay every 6 months).
  3. The 1099 Shows a fee which appears to be a ATM fee reimbursement, I assume this has nothing to do with Tbill or TIPS or taxes in general?
So to enter this into HR Block software, I have to create two 1099-Int entries, one for the 1099-int and the other for 1099-OID?

For the OID, I would select the option "Brought or sold this bond between interest payments" and then enter the "accused interest paid on the purchase"?

Anything I might be missing?
Let's take your two questions and address them individually. First, the T-bills: T-bills are always 12 months or less, so can you clarify purchasing something in November on the primary market and maturing in 2026? If you purchased something at auction in November 2024 and it matures in 2026, it's not a T-bill but a T-note. If you provide the full information, we can then tell you about the taxation you'd expect.
Sorry, I meant to say purchased in 2024 and then mature in 2025. It is a Tbill. I am assuming that tbills are taxed in the year it matures?
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Kevin M
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

gavinsiu wrote: Sat Jan 25, 2025 7:40 pm A question on taxation of Tbill and TIPS after treading through the various post. So I purchased a bunch of T-Bills on the primary market and then some TIPS on the secondary market.
  1. Can I assume that Tbill are tax upon maturity? So If purchase a TBill in Nov and it matures next year, it's going to be taxable next year? I am thinking that this is correct since it would show up in 1099-INT but wanted to make sure.
  2. On the 1099 consolidated is an entry that said "Accrued Interest Paid on Purchases". I am thinking that this is the interest accursed to the seller because I purchased on the secondary market. The TIPS were purchased around April or before and therefore has had a coupon payment or two since (TIPS pay every 6 months).
  3. The 1099 Shows a fee which appears to be a ATM fee reimbursement, I assume this has nothing to do with Tbill or TIPS or taxes in general?
So to enter this into HR Block software, I have to create two 1099-Int entries, one for the 1099-int and the other for 1099-OID?

For the OID, I would select the option "Brought or sold this bond between interest payments" and then enter the "accused interest paid on the purchase"?

Anything I might be missing?
1. Yes.

2. Yes, you deduct the interest paid to seller as you indicate.

3. Correct.

Yes, 1099-INT and 1099-OID are two separate forms, so are entered as such in HRB.
If I make a calculation error, #Cruncher probably will let me know.
gavinsiu
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Re: Taxation of Treasury bills, notes and bonds

Post by gavinsiu »

Kevin M wrote: Mon Jan 27, 2025 1:40 pm
gavinsiu wrote: Sat Jan 25, 2025 7:40 pm A question on taxation of Tbill and TIPS after treading through the various post. So I purchased a bunch of T-Bills on the primary market and then some TIPS on the secondary market.
  1. Can I assume that Tbill are tax upon maturity? So If purchase a TBill in Nov and it matures next year, it's going to be taxable next year? I am thinking that this is correct since it would show up in 1099-INT but wanted to make sure.
  2. On the 1099 consolidated is an entry that said "Accrued Interest Paid on Purchases". I am thinking that this is the interest accursed to the seller because I purchased on the secondary market. The TIPS were purchased around April or before and therefore has had a coupon payment or two since (TIPS pay every 6 months).
  3. The 1099 Shows a fee which appears to be a ATM fee reimbursement, I assume this has nothing to do with Tbill or TIPS or taxes in general?
So to enter this into HR Block software, I have to create two 1099-Int entries, one for the 1099-int and the other for 1099-OID?

For the OID, I would select the option "Brought or sold this bond between interest payments" and then enter the "accused interest paid on the purchase"?

Anything I might be missing?
1. Yes.

2. Yes, you deduct the interest paid to seller as you indicate.

3. Correct.

Yes, 1099-INT and 1099-OID are two separate forms, so are entered as such in HRB.
Thanks Kevin for the clarification.
ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

I bought some TVA bonds last year. I understand these are exempt from state tax, like other federal agencies. However, my Wells Trade 1099-INT doesn't include them in Box 3 (Interest on U.S. Savings Bonds and Treasury Obligations). I'm not sure if this is because WT doesn't consider TVA bonds to be a treasury obligation and thus not exempt from state tax, but everything I've read indicates that federal agency bonds are indeed state tax exempt.

If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
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Re: Taxation of Treasury bills, notes and bonds

Post by JayB »

ginahoy wrote: Fri Jan 31, 2025 11:18 am I bought some TVA bonds last year. I understand these are exempt from state tax, like other federal agencies. However, my Wells Trade 1099-INT doesn't include them in Box 3 (Interest on U.S. Savings Bonds and Treasury Obligations). I'm not sure if this is because WT doesn't consider TVA bonds to be a treasury obligation and thus not exempt from state tax, but everything I've read indicates that federal agency bonds are indeed state tax exempt.

If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
I hold lots of TVA bonds and the 1099-INT also does NOT include their interest in Box 3. Technically, TVA bonds are not Treasury Obligations. However, on my PA state tax return Schedule A (Taxable Interest Income), there is a place to subtract out Interest income from direct obligations of the US Government (line 7). And there is an additional line (8) entitled "Other reduction adjustments." It is on the latter line that I enter the total of all Agency interest that is not taxable in my state. On line 8, I also include a description: "PA-Exempt interest from TVA U.S. Agency Bonds."

Unfortunately, I have tried repeatedly to work these amounts through Turbotax (online), and it never gets it right. So I end up paper filing my State return.
ginahoy
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

JayB wrote: Fri Jan 31, 2025 11:26 amI hold lots of TVA bonds and the 1099-INT also does NOT include their interest in Box 3.
Thanks for your reply. Which brokerage house? I'm wondering if this is just a Wells Trade thing, or universal.

EDIT: I just noticed my Wells Trade 1099 includes a footnote for the TVA lot:
"This income may be exempt at the state level. Please contact your tax advisor or state revenue department as state tax laws vary."

I recall that some (many?) states don't exempt captial gains for US gov't obligations, but my understanding is that all states are required to exempt interest income from gov't agencies. If that's not the case, and given the footnote, then I can understand why TVA isn't included in Box 3.
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Re: Taxation of Treasury bills, notes and bonds

Post by JayB »

ginahoy wrote: Fri Jan 31, 2025 11:31 am
JayB wrote: Fri Jan 31, 2025 11:26 amI hold lots of TVA bonds and the 1099-INT also does NOT include their interest in Box 3.
Thanks for your reply. Which brokerage house? I'm wondering if this is just a Wells Trade thing, or universal.

EDIT: I just noticed my Wells Trade 1099 includes a footnote for the TVA lot:
"This income may be exempt at the state level. Please contact your tax advisor or state revenue department as state tax laws vary."

I recall that some (many?) states don't exempt captial gains for US gov't obligations, but my understanding is that all states are required to exempt interest income from gov't agencies. If that's not the case, and given the footnote, then I can understand why TVA isn't included in Box 3.
My TVA holdings are with Fidelity. I'm reasonably sure there's a place to exclude the interest from these on your State return, although it may still be something that tax software can't handle correctly, like in my case with TurboTax. As for capital gains from US Gov't obligations, I believe they are always taxable at the federal level and probably at the state level too. I have had many T-bills sold prior to maturity that have capital gains displayed and have always paid tax on them at the federal and state level.
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

JayB wrote: Fri Jan 31, 2025 11:48 amAs for capital gains from US Gov't obligations, I believe they are always taxable at the federal level and probably at the state level too.
Of course cap gains on treasuries are taxable at the federal level, but I seem to recall comments elsewhere in this thread that indicate certain states, either explicitly or implicitly (by not saying otherwise), exempt cap gains on treasuries. In any case, I'm not sure why I brought that up.

My question was whether interest federal agency bonds is *required* to be tax exempt in all states, as is the case for T-bills, notes & bonds.
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Re: Taxation of Treasury bills, notes and bonds

Post by ofckrupke »

ginahoy wrote: Fri Jan 31, 2025 12:00 pm My question was whether interest federal agency bonds is *required* to be tax exempt in all states, as is the case for T-bills, notes & bonds.
Yes for all states, but not all so-called agencies have this state exemption feature. Notably, TVA, FFCB, FHLB do.

The other thing subject to blur in these discussions is "interest". The exemption applies to all states for coupon interest. But gain/loss at disposition also needs to be divided between accrued market discount/premium and capital gain/loss. Accrued market discount gets taxed as ordinary income (unless it satisfies the de minimis criterion in which case it's treated as capital gain), like interest, and is also granted tax exemption in almost all states if the bond or note was from UST or one of the qualifying agencies. Because of the tax treatment and the way it's integrated into yield-to-maturity calculations it's all too easy to ungrasp the distinction between coupon and noncoupon components of one's total return at disposition (whether at maturity or before). But if you didn't dispose of any market discount bonds in 2024 and have not elected to accrue/report market discount currently (annually), then this is a future, not a current year tax reporting issue.
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Re: Taxation of Treasury bills, notes and bonds

Post by JayB »

ginahoy wrote: Fri Jan 31, 2025 12:00 pm My question was whether interest federal agency bonds is *required* to be tax exempt in all states, as is the case for T-bills, notes & bonds.
I think the state tax exemption rules on Agency interest vary state to state. For instance, in PA, Federal Home Loan Bank interest is exempt but Ginnie Mae and Fannie Mae interest is not exempt. You can view the full list of exemptions and non-exemptions for PA at: https://www.pa.gov/agencies/revenue/for ... erest.html
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Re: Taxation of Treasury bills, notes and bonds

Post by ofckrupke »

JayB wrote: Fri Jan 31, 2025 12:58 pm I think the state tax exemption rules on Agency interest vary state to state. For instance, in PA, Federal Home Loan Bank interest is exempt but Ginnie Mae and Fannie Mae interest is not exempt.
Show me an income-taxing state for which Ginnie or Fannie Mae interest is exempt.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

JayB wrote: Fri Jan 31, 2025 11:26 am
ginahoy wrote: Fri Jan 31, 2025 11:18 am I bought some TVA bonds last year. I understand these are exempt from state tax, like other federal agencies. However, my Wells Trade 1099-INT doesn't include them in Box 3 (Interest on U.S. Savings Bonds and Treasury Obligations). I'm not sure if this is because WT doesn't consider TVA bonds to be a treasury obligation and thus not exempt from state tax, but everything I've read indicates that federal agency bonds are indeed state tax exempt.

If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
I hold lots of TVA bonds and the 1099-INT also does NOT include their interest in Box 3. Technically, TVA bonds are not Treasury Obligations. However, on my PA state tax return Schedule A (Taxable Interest Income), there is a place to subtract out Interest income from direct obligations of the US Government (line 7). And there is an additional line (8) entitled "Other reduction adjustments." It is on the latter line that I enter the total of all Agency interest that is not taxable in my state. On line 8, I also include a description: "PA-Exempt interest from TVA U.S. Agency Bonds."

Unfortunately, I have tried repeatedly to work these amounts through Turbotax (online), and it never gets it right. So I end up paper filing my State return.
I don't use online tax software because download versions offer more flexibility. With the HRB download version, you can enter items directly into forms, and this can be a way to enter state subtractions or additions that may not be possible in the interview. Worst case, you can override a form entry, but then you cannot e-file. I have done both for some more complicated returns.
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 Artsdoctor »

ginahoy wrote: Fri Jan 31, 2025 11:18 am I bought some TVA bonds last year. I understand these are exempt from state tax, like other federal agencies. However, my Wells Trade 1099-INT doesn't include them in Box 3 (Interest on U.S. Savings Bonds and Treasury Obligations). I'm not sure if this is because WT doesn't consider TVA bonds to be a treasury obligation and thus not exempt from state tax, but everything I've read indicates that federal agency bonds are indeed state tax exempt.

If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
It will depend on your tax software. For example, if you were using TurboTax for California, you'd go into your state tax return to Schedule CA where interest and dividends are either added or subtracted. You'd find that the line for subtracting your GSE interest would take you to a worksheet where you'd be able to easily enter the GSE interest and note the name of the bond. All of that would then be integrated into your CA tax return and you wouldn't have to override anything. I can't speak for other software programs.
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US Treasury Taxation Question

Post by leo383 »

[This thread has been merged into this on-going discussion. Moderator Pops1860]

I know this is a frequently covered topic, but I have a question I haven't gotten clarity on.

Let's say I buy a Treasury note on the secondary market. I hold to maturity. I bought it at 97 and it has a 4 % coupon.

The income from the coupon is state tax exempt. No question.

Now, I understand the price appreciation from 97 to 100 at maturity may or may not be state taxable, and this varies state by state.

Is there a list of states where the appreciation would be taxable and where it wouldn't be taxable?
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Artsdoctor wrote: Fri Jan 31, 2025 3:21 pm
ginahoy wrote: Fri Jan 31, 2025 11:18 am I bought some TVA bonds last year. I understand these are exempt from state tax, like other federal agencies. However, my Wells Trade 1099-INT doesn't include them in Box 3 (Interest on U.S. Savings Bonds and Treasury Obligations). I'm not sure if this is because WT doesn't consider TVA bonds to be a treasury obligation and thus not exempt from state tax, but everything I've read indicates that federal agency bonds are indeed state tax exempt.

If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
It will depend on your tax software. For example, if you were using TurboTax for California, you'd go into your state tax return to Schedule CA where interest and dividends are either added or subtracted. You'd find that the line for subtracting your GSE interest would take you to a worksheet where you'd be able to easily enter the GSE interest and note the name of the bond. All of that would then be integrated into your CA tax return and you wouldn't have to override anything. I can't speak for other software programs.
Whether or not 1099-INT shows the interest in box 1 or 3 does not depend on tax software.
If I make a calculation error, #Cruncher probably will let me know.
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Re: US Treasury Taxation Question

Post by Makefile »

Depending on whether this list in the wiki is up to date (https://www.bogleheads.org/wiki/State_income_taxes) capital gains on Treasury bonds might not be taxable in: Maryland, Michigan, New Jersey, and Virginia.
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Re: Taxation of Treasury bills, notes and bonds

Post by ginahoy »

JayB wrote: Fri Jan 31, 2025 12:58 pmYou can view the full list of exemptions and non-exemptions for PA at: https://www.pa.gov/agencies/revenue/for ... erest.html
Thanks! This list includes Tennessee Valley Authority with the legal reference (16 USC §831n-4(d)) that stipulates:
Bonds issued by the Corporation hereunder shall be exempt both as to principal and interest from all taxation now or hereafter imposed by any State or local taxing authority except estate, inheritance, and gift taxes.
Exactly what I wanted to know.
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Re: US Treasury Taxation Question

Post by w5000 »

I thought you had to amortize the market discount on a bond over the life/holding-period of the bond and it counted as ordinary (interest) income?

My understanding is that you only have a capital gain if you sell the bond before maturity and the value of the bond has changed due to changes in prevailing interest rates (or because you have effectively moved along the yield curve).
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Re: Taxation of Treasury bills, notes and bonds

Post by KeepinItPositive »

Trying to do 2024 taxes and am pretty confused on how to properly account for 'Accrued Market Discount' on Treasury Notes. My consolidated 1099 comes from fidelity and I'm using HR Block. I believe my Fidelity account is setup with default settings in terms of interest treatment.

I imported the 1099 from fidelity and it did not include anything in '1f: Accrued Market Discount' field even though the pdf version has a value for that field. It also imported a 1099-INT and 1099-OID for the account. The OID amount is close, but not an exact match to the Accrued Market Discount. (not sure if that is relevant)

If I input an amount in the 1f field (say X), the next question asks about a 'market discount adjustment'. It seems to suggest that I should enter in -X in the adjustment field, which lowers my tax liability but then suggests that I need to enter this in the 1099-INT section ("Tell us the amount here, but you'll also need to enter it in Interest Income (Form 1099-INT). I'm not sure what this means.

In short my questions are
1. Why did the import not populate the 1f field?
2. Do I need to enter it in 1f even though the import did not?
3. Do I need include this amount in the market discount adjustment field on the next page as a negative amount?
4. Do I need to make any alterations to the fields that capture the 1099-INT values?

Thoughts? Is there a primer somewhere on these terms? (tried to find one but did not succeed)

Thanks!
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Re: US Treasury Taxation Question

Post by ginahoy »

leo383 wrote: Fri Jan 31, 2025 4:55 pmLet's say I buy a Treasury note on the secondary market. I hold to maturity. I bought it at 97 and it has a 4 % coupon.

The income from the coupon is state tax exempt. No question.

Now, I understand the price appreciation from 97 to 100 at maturity may or may not be state taxable, and this varies state by state.

Is there a list of states where the appreciation would be taxable and where it wouldn't be taxable?
For federal purposes, the gain from 97 to 100 is reported to the IRS on 1099-B, line 1f (accrued market discount). Since you held to maturity, it's considered ordinary (interest) income, not a capital gain, and thus ultimately ends up on your 1040 Schedule B (as explained in the instructions for Form 8949). And since accrued market discount is considered interest income by the feds, I believe it's tax exempt in all states. I trust someone will correct me if this is not correct.

Selling it prior to maturity could generate a capital gain if proceeds exceed the ratable accrued market discount (due to higher prevailing interest rate vs coupon). Here's a quote from Pub 550:
If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. See Market Discount Bonds in chapter 1. The rest of the gain is capital gain.
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Re: Taxation of Treasury bills, notes and bonds

Post by Artsdoctor »

Kevin M wrote: Fri Jan 31, 2025 7:35 pm
Artsdoctor wrote: Fri Jan 31, 2025 3:21 pm
It will depend on your tax software. For example, if you were using TurboTax for California, you'd go into your state tax return to Schedule CA where interest and dividends are either added or subtracted. You'd find that the line for subtracting your GSE interest would take you to a worksheet where you'd be able to easily enter the GSE interest and note the name of the bond. All of that would then be integrated into your CA tax return and you wouldn't have to override anything. I can't speak for other software programs.
Whether or not 1099-INT shows the interest in box 1 or 3 does not depend on tax software.
That's very true. But how it's entered into your final tax form will depend on the software. No matter how it's reported on your 1099, you might still have to make sure that it's entered correctly on your state tax form and sometimes that has to be manually. It's how it's done manually that will depend on your tax software.

This is February 3, so you know there will be innumerable questions now about how to handle treasuries and GSEs on state tax reporting, including tax software entries. People will try to download their tax forms with the expectation that everything will go where it's supposed to, and we know that that's not always the case.
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Re: US Treasury Taxation Question

Post by exodusing »

ginahoy wrote: Sun Feb 02, 2025 8:08 pm
leo383 wrote: Fri Jan 31, 2025 4:55 pmLet's say I buy a Treasury note on the secondary market. I hold to maturity. I bought it at 97 and it has a 4 % coupon.

The income from the coupon is state tax exempt. No question.

Now, I understand the price appreciation from 97 to 100 at maturity may or may not be state taxable, and this varies state by state.

Is there a list of states where the appreciation would be taxable and where it wouldn't be taxable?
For federal purposes, the gain from 97 to 100 is reported to the IRS on 1099-B, line 1f (accrued market discount). Since you held to maturity, it's considered ordinary (interest) income, not a capital gain, and thus ultimately ends up on your 1040 Schedule B (as explained in the instructions for Form 8949).And since accrued market discount is considered interest income by the feds, I believe it's tax exempt in all states. I trust someone will correct me if this is not correct.

Selling it prior to maturity could generate a capital gain if proceeds exceed the ratable accrued market discount (due to higher prevailing interest rate vs coupon). Here's a quote from Pub 550:
If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. See Market Discount Bonds in chapter 1. The rest of the gain is capital gain.
Some states exempt AMD on treasuries, some explicitly tax it and it's unclear in the others. There are various state rules and court rulings on the subject. See, for example, viewtopic.php?t=425494 which covers NY but mentions other states.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Artsdoctor wrote: Mon Feb 03, 2025 8:18 am
Kevin M wrote: Fri Jan 31, 2025 7:35 pm Whether or not 1099-INT shows the interest in box 1 or 3 does not depend on tax software.
That's very true. But how it's entered into your final tax form will depend on the software. No matter how it's reported on your 1099, you might still have to make sure that it's entered correctly on your state tax form and sometimes that has to be manually. It's how it's done manually that will depend on your tax software.

This is February 3, so you know there will be innumerable questions now about how to handle treasuries and GSEs on state tax reporting, including tax software entries. People will try to download their tax forms with the expectation that everything will go where it's supposed to, and we know that that's not always the case.
Sure, but you didn't quote the question that we were answering:
ginahoy wrote: Fri Jan 31, 2025 11:18 am If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
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 Artsdoctor »

^ This has been addressed before on Bogleheads:

viewtopic.php?t=424505

It was the same time of year last year, and the same issued came up. A Boglehead poster described GSE interest being on Line 1 although the interest was apparently tax-exempt in his particular state.
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Re: Taxation of Treasury bills, notes and bonds

Post by ofckrupke »

ginahoy wrote: Fri Jan 31, 2025 11:18 am If anyone else holds federal agency bonds, I'd be interested to know if your 1099 includes the interest in Box 1 or Box 3.
For tax year 2023:

a) For a FFCB agency bond, Vanguard's 1099INT put the interest (accrued to an early redemption) on line 3.

b) For FFCB bonds at Schwab, all coupon/stated interest was reported on line 1, none on line 3.

I don't use tax software so I did not have to trick it into flowing the 1099INT data to proper locations on Schedule B or my state's forms/schedules or supporting worksheets or stress about which broker had done right and which wrong.

For tax year 2024, my only agency bond (FFCB) was at Schwab; again, Schwab reported the interest received on line 1.
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Re: Taxation of Treasury bills, notes and bonds

Post by Artsdoctor »

^ And this is the rub. It's the whole point of the recent thread.

For posterity's sake, here's what we've learned.

Ofckrupke is excellent at taxation questions and he confirms that GSE interest can be entered on either line, and that different institutions may handle it differently (he mentioned Vanguard and Schwab, the previous post I linked mentioned Fidelity). This means that you cannot rely on the institution's 1099-INT to be applicable for your return.

It's up to the investor to know what's going on because of this variability. And the investor will need to verify that that particular GSE interest is exempt in his/her state.

Then, it's up to the investor to make sure that the interest is then entered properly on the state tax return. I can only speak for CA and TurboTax--it's pretty straightforward, you don't need overrides, and you don't need dummy entries. However, you need to be familiar with your software program and you can't rely on automatic downloads.

If investors don't feel comfortable with all of this, then consider foregoing buying GSE bonds in your taxable account.
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