Taxation of Treasury bills, notes and bonds

[WalkingBackToHouston]

these are the questions I plan to ask...
1) For any bond that paid it's first coupon this year: are you sure the accrued interest I paid as part of treasury purchase price is getting subtracted from the first coupon clipped this year?
2) For any bond that matured this year, are you sure the accrued market discount (both long term and short term) is getting taxed as interest?
Reasonable?

Your first question is rather basic... I can't imagine an experienced CPA would miss that, but question 2 has multiple moving parts.

Rather than questioning your CPA in advance, I recommend waiting until he gives you your completed returns to sign. Request to receive via email so you can review at your leisure without pretense. Then check your Sch B and 8949's and post specific questions here. Hopefully your returns will be ready well ahead of the filing deadline

so here is what he did. I anonymized the actual numbers. Does this look right?

Starting with a 1099-B that reports
$500 in totals row for column 1f (AMD) for Box A Short Term Capital Gains Treasury notes
$500 in totals row for column 1f (AMD) for Box D Long Term Capital Gains Treasury notes

First he adjusts the long and short term capital gains to take out the AMD
Form 8949 Part 1 (A checked) row 2 (totals) column (g) ($500)
Form 8949 Part 2 (D checked) row 2 (totals) column (g) ($500)

Then he moves the AMD capital gains offsets from above to schedule D
Schedule D Part 1 row 1b column (g) ($500)
Schedule D Part 2 row 8b column (g) ($500)

Finally he reports the AMD as interest on Schedule B Part 1 Interest
[Name of Brokerage] Accrued Discount $1,000

[Kevin M]

Your first question is rather basic... I can't imagine an experienced CPA would miss that, but question 2 has multiple moving parts.

Rather than questioning your CPA in advance, I recommend waiting until he gives you your completed returns to sign. Request to receive via email so you can review at your leisure without pretense. Then check your Sch B and 8949's and post specific questions here. Hopefully your returns will be ready well ahead of the filing deadline

so here is what he did. I anonymized the actual numbers. Does this look right?

Starting with a 1099-B that reports
$500 in totals row for column 1f (AMD) for Box A Short Term Capital Gains Treasury notes
$500 in totals row for column 1f (AMD) for Box D Long Term Capital Gains Treasury notes

First he adjusts the long and short term capital gains to take out the AMD
Form 8949 Part 1 (A checked) row 2 (totals) column (g) ($500)
Form 8949 Part 2 (D checked) row 2 (totals) column (g) ($500)

Then he moves the AMD capital gains offsets from above to schedule D
Schedule D Part 1 row 1b column (g) ($500)
Schedule D Part 2 row 8b column (g) ($500)

Finally he reports the AMD as interest on Schedule B Part 1 Interest
[Name of Brokerage] Accrued Discount $1,000

Yes, this looks right.

With tax software, the values in the 8949s automatically flow to Schedule D (at least that's the way it works with HRB and TurboTax). Tax software may or may not automatically make the appropriate subtraction on Schedule B.

[WalkingBackToHouston]

so here is what he did. I anonymized the actual numbers. Does this look right?

Starting with a 1099-B that reports
$500 in totals row for column 1f (AMD) for Box A Short Term Capital Gains Treasury notes
$500 in totals row for column 1f (AMD) for Box D Long Term Capital Gains Treasury notes

First he adjusts the long and short term capital gains to take out the AMD
Form 8949 Part 1 (A checked) row 2 (totals) column (g) ($500)
Form 8949 Part 2 (D checked) row 2 (totals) column (g) ($500)

Then he moves the AMD capital gains offsets from above to schedule D
Schedule D Part 1 row 1b column (g) ($500)
Schedule D Part 2 row 8b column (g) ($500)

Finally he reports the AMD as interest on Schedule B Part 1 Interest
[Name of Brokerage] Accrued Discount $1,000

Yes, this looks right.

With tax software, the values in the 8949s automatically flow to Schedule D (at least that's the way it works with HRB and TurboTax). Tax software may or may not automatically make the appropriate subtraction on Schedule B.

I see this as an important thread. Thanks for starting it. Perhaps it should be sticky?
And thanks to all contributors here. I have added a couple of checkpoints to my taxes every year.

[Kevin M]

Yes, this looks right.

With tax software, the values in the 8949s automatically flow to Schedule D (at least that's the way it works with HRB and TurboTax). Tax software may or may not automatically make the appropriate subtraction on Schedule B.

I see this as an important thread. Thanks for starting it. Perhaps it should be sticky?
And thanks to all contributors here. I have added a couple of checkpoints to my taxes every year.

Glad you're finding it useful. I don't know what the process is to make a thread sticky, but you could always PM a moderator and ask.

[Obscureone]

I'm completely confused, I got a 1099B from TreasuryDirect w/r/t several 2 year Treasury Notes I bought as new issues at auction that matured last year. Am I supposed to report the difference between my basis and the proceeds as long term capital gains rather than interest? Box 1f, accrued market discount, is $0 on all of them. Ref Box 2 says Type of Gain or Loss is Long-Term. The Treasury issued each of these notes at a very slight discount ranging from around $16 to 95 cents. I've looked at Pub 550 and treasurydirect.gov and I'm still lost. Even though it's been many years since interest rates were high enough to tempt me, I did formerly invest in these all the time and I only ever had to report interest, not fill out a Form 8949 and Schedule D.

Thanks in advance for any guidance, and my apologies if this question has already been answered, this is a very very long thread and what I've read of it seemed to be focused on secondary market transactions.

[FactualFran]

I'm completely confused, I got a 1099B from TreasuryDirect w/r/t several 2 year Treasury Notes I bought as new issues at auction that matured last year. Am I supposed to report the difference between my basis and the proceeds as long term capital gains rather than interest? Box 1f, accrued market discount, is $0 on all of them. Ref Box 2 says Type of Gain or Loss is Long-Term. The Treasury issued each of these notes at a very slight discount ranging from around $16 to 95 cents. I've looked at Pub 550 and treasurydirect.gov and I'm still lost. Even though it's been many years since interest rates were high enough to tempt me, I did formerly invest in these all the time and I only ever had to report interest, not fill out a Form 8949 and Schedule D.

On an income tax return you are suppose to include the amounts on the 1099-B from TreasuryDirect for the proceeds and basis.

With 2-year T-Notes bought at auction and held to maturity, the 1099-B should indicate that the sales were of long-term covered securities. The sum of the proceeds and basis can be reported in the corresponding columns of line 8a of Schedule D. The "gain or (loss)" column of that line should contain the result of subtracting the amount in the basis column from the amount in the proceeds column. The gain of (loss) on that line is used in other calculations on Schedule D and a net amount of capital gain or loss ends up on line 7 of Form 1040 of the income tax return.

[Obscureone]

Thanks I appreciate the clarity.

[cas]

Am I supposed to report the difference between my basis and the proceeds as long term capital gains rather than interest?

Box 1f, accrued market discount, is $0 on all of them. [. . .]

The Treasury issued each of these notes at a very slight discount ranging from around $16 to 95 cents.

In addition to what FactualFran wrote, if there is nothing in Box 1f those are probably de minimis discounts, which has a special rule that it is reported and taxed as capital gain (nothing Box 1f on 1099-B, stays taxed as capital gain on Form 8949/Schedule D) rather than market discount (Box 1f on 1099-B, migrating over to be taxed as interest on Schedule B).

There has been quite a bit of confusion caused by de minimis discounts on the forum this tax season, e.g. see this discussion starting on p. 26 of this thread.

(Or the terms "de minimis" and "one-fourth of 1%" will give you something to search for in Publication 550, if you would rather have an official source.)

[Electron]

On the de minimis calculation, ofckrupke pointed out that the term needs to be checked carefully for securities purchased at auction. The actual term may be slightly less than the stated number of years. In that case, one needs to round down to the nearest full year when calculating the de minimis threshold.

The de minimis threshold would be calculated as the Face Value x 0.0025 x Number of Full Years.

I checked a number of Treasury Notes and Treasury Bonds sold recently at auction.

https://www.treasurydirect.gov/auctions ... a-results/

Code: Select all

Security  CUSIP  Reopening  Issue      Maturity  High Yld  Rate

3-Year  91282CMS7   No   03/17/2025   03/15/2028  3.908%  3.875%
7-Year  91282CMR9   No   02/28/2025   02/29/2032  4.194%  4.125%
5-Year  91282CGQ8   Yes  02/28/2025   02/28/2030  4.123%  4.000%
2-Year  91282CMP3   No   02/28/2025   02/28/2027  4.169%  4.125%
10-Year 91282CMM0   No   02/18/2025   02/15/2035  4.632%  4.625%

20-Year 912810UJ5   No   02/28/2025   02/15/2045  4.830%  4.750%
30-Year 912810UG1   No   02/18/2025   02/15/2055  4.748%  4.625%

As you can see, the actual term in several cases is less than the stated maturity.

[CaptainMMW]

Thank you for this thread. I do my own taxes and this thread was super helpful with some fine points I would have missed otherwise. Small impact $ wise this year, but it could have had a bigger impact in the future. Plus, it feels good to get it right. Cheers, All!

[Artsdoctor]

On the de minimis calculation, ofckrupke pointed out that the term needs to be checked carefully for securities purchased at auction. The actual term may be slightly less than the stated number of years. In that case, one needs to round down to the nearest full year when calculating the de minimis threshold.

The de minimis threshold would be calculated as the Face Value x 0.0025 x Number of Full Years.

I checked a number of Treasury Notes and Treasury Bonds sold recently at auction.

https://www.treasurydirect.gov/auctions ... a-results/

Code: Select all

Security  CUSIP  Reopening  Issue      Maturity  High Yld  Rate

3-Year  91282CMS7   No   03/17/2025   03/15/2028  3.908%  3.875%
7-Year  91282CMR9   No   02/28/2025   02/29/2032  4.194%  4.125%
5-Year  91282CGQ8   Yes  02/28/2025   02/28/2030  4.123%  4.000%
2-Year  91282CMP3   No   02/28/2025   02/28/2027  4.169%  4.125%
10-Year 91282CMM0   No   02/18/2025   02/15/2035  4.632%  4.625%

20-Year 912810UJ5   No   02/28/2025   02/15/2045  4.830%  4.750%
30-Year 912810UG1   No   02/18/2025   02/15/2055  4.748%  4.625%

As you can see, the actual term in several cases is less than the stated maturity.

Nice work. This is not generally acknowledged. There really are quite a few 2-year, 3-year, 5-year, etc., notes where a single day discrepancy in maturity could bump you out of a capital gain calculation and into fully taxable interest calculation on a federal level. Fortunately, these numbers are usually very small, but it is worth keeping in mind if you're dealing with very large sums.

[ofckrupke]

As you can see, the actual term in several cases is less than the stated maturity.

Nice work. This is not generally acknowledged. There really are quite a few 2-year, 3-year, 5-year, etc., notes where a single day discrepancy in maturity could bump you out of a capital gain calculation and into fully taxable interest calculation on a federal level. Fortunately, these numbers are usually very small, but it is worth keeping in mind if you're dealing with very large sums.

But if one buys at auction in the initial opening of a treasury note or bond then any acquisition discount thereon is guaranteed to be de minimis as #Cruncher has shown upthread. An easy way to see this is that the threshold is 0.25% per full year at acquisition settlement, and in an initial opening the coupon will be chosen at the next 1/8% below the struck yield so the gap is less than 0.125%. The factor of >=2 difference is barely sufficient under the worst case yield to cover for the truncation of an incomplete year on a two-year note, but the margin by which the de minimis criterion is met in worst case grows ever greater for notes with longer terms.

This guarantee does not exist for re-openings or acquisitions on the secondary market.

[Artsdoctor]

Nice work. This is not generally acknowledged. There really are quite a few 2-year, 3-year, 5-year, etc., notes where a single day discrepancy in maturity could bump you out of a capital gain calculation and into fully taxable interest calculation on a federal level. Fortunately, these numbers are usually very small, but it is worth keeping in mind if you're dealing with very large sums.

But if one buys at auction in the initial opening of a treasury note or bond then any acquisition discount thereon is guaranteed to be de minimis as #Cruncher has shown upthread. An easy way to see this is that the threshold is 0.25% per full year at acquisition settlement, and in an initial opening the coupon will be chosen at the next 1/8% below the struck yield so the gap is less than 0.125%. The factor of >=2 difference is barely sufficient under the worst case yield to cover for the truncation of an incomplete year on a two-year note, but the margin by which the de minimis criterion is met in worst case grows ever greater for notes with longer terms.

This guarantee does not exist for re-openings or acquisitions on the secondary market.

I don't think I've ever seen #cruncher make an erroneous calculation along these lines so your take about having the guarantee is a good one. So basically, as long as you avoid re-openings, you'll always have a de minimis event if you're purchasing your notes and bonds at auction (unless there's a slight premium at auction). I never go further out than 2-year notes but for people going longer, that's very helpful to know.

[Parkinglotracer]

I am trying not to laugh at this complicated discussion over how to correctly report interest and capital gains on nominal treasury securities. I am laughing because I have a short term ( about three year ) treasury ladder across my fixed income portfolio - both taxable and tax deferred . I went in that direction for simplicity and the transparency of a ladder compared to a rolling bond fund. lol. So much for the transparency of my ladder.

I auto imported my vanguard 1099 tax documents into turbo tax and filed my return with no changes to how vanguard imported the data.

I had bought and sold a couple treasury notes due to a house purchase in this 2024 tax year with about $1570 Accrued Market Discount that was reported but not reported to me as adding to my capital gains. I did have $1468 of treasury interest and $466 treasury accrued interest recd reported as interest income.

I’ll have to hire a CPA to see if turbo tax reported this all correctly for our taxes. NOT.

[bongo]

I auto imported my vanguard 1099 tax documents into turbo tax and filed my return with no changes to how vanguard imported the data.

I had bought and sold a couple treasury notes due to a house purchase in this 2024 tax year with about $1570 Accrued Market Discount that was reported but not reported to me as adding to my capital gains. I did have $1468 of treasury interest and $466 treasury accrued interest recd reported as interest income.

I’ll have to hire a CPA to see if turbo tax reported this all correctly for our taxes. NOT.

Sounds like the AMD was handled correctly if it netted out your cap gains, but someone did report that their brokerage import did not pick up the col 1f values. And since you are using TT, then the AMD probably properly showed up as extra line items on Sch B - but you might have to manually remove it from your state income form.

Also, if you purchased the Notes on the secondary, there might have been accrued interest paid which does not get imported. You have to tick a box and key it in manually.

Both of these things could reduce your taxes a bit over simply filing "with no changes to how vanguard imported the data"

[gatorking]

[Thread merged into here --admin LadyGeek]

I purchased US Treasury note 912828YV6 at Fidelity on 12/01/2023 (corrected from 2024) and held it till Maturity. Cost basis was ~23800 and proceeds was 25000.
Note: original issue date was 12/02/2019 and Maturity date is supposed to be 11/30/2024
In my 2024 1099-B Fidelity lists this as Long term with disposition date of 12/02/2024.

Questions:
Why is disposition date after the maturity date? This difference essentially made this Long term gain instead of Short term.
Is this long term gain exempt from MA state tax?

Thanks.

[ofckrupke]

I purchased US Treasury note 912828YV6 at Fidelity on 12/01/20242023 and held it till Maturity. Cost basis was ~23800 and proceeds was 25000.
Note: original issue date was 12/02/2019 and Maturity date is supposed to be 11/30/2024
In my 2024 1099-B Fidelity lists this as Long term with disposition date of 12/02/2024.

Questions:
Why is disposition date after the maturity date? This difference essentially made this Long term gain instead of Short term.
Is this long term gain exempt from MA state tax?

On the first question it seems the answer is that disposition of a matured security necessarily involves the repayment of principal with the final interest payment; because this note matured on a Saturday that did not occur until the following Monday (2 Dec 2024).

However, the ST vs LT nature of the holding is irrelevant here because the note was acquired with Market Discount exceeding the de minimis threshold, and so the accrued market discount is federally taxable as ordinary income rather than as capital gain. A correct treatment will involve adjustment of the basis on a form 8949 part 2 such that the CG in column h amounts to zero, a corresponding entry on Schedule D (line 10 most likely), and an amount equal to the adjustment to be reported as interest on Schedule B part 1 below the subtotal.
[Did Fidelity really report the proceeds less cost as a nonzero LT capital gain (without basis adjustment), and was nothing reported in the Market Discount field of the 1099-INT?]

Most states exempt accrued market discount interest on treasury securities from taxation, but I can't speak to MA specifically.

[Parkinglotracer]

I auto imported my vanguard 1099 tax documents into turbo tax and filed my return with no changes to how vanguard imported the data.

I had bought and sold a couple treasury notes due to a house purchase in this 2024 tax year with about $1570 Accrued Market Discount that was reported but not reported to me as adding to my capital gains. I did have $1468 of treasury interest and $466 treasury accrued interest recd reported as interest income.

I’ll have to hire a CPA to see if turbo tax reported this all correctly for our taxes. NOT.

Sounds like the AMD was handled correctly if it netted out your cap gains, but someone did report that their brokerage import did not pick up the col 1f values. And since you are using TT, then the AMD probably properly showed up as extra line items on Sch B - but you might have to manually remove it from your state income form.

Also, if you purchased the Notes on the secondary, there might have been accrued interest paid which does not get imported. You have to tick a box and key it in manually.

Both of these things could reduce your taxes a bit over simply filing "with no changes to how vanguard imported the data"

Thank you I will check that out. I am a resident of NY and will see how it was imported to my state return I filed with turbo tax.

[gatorking]

[Did Fidelity really report the proceeds less cost as a nonzero LT capital gain (without basis adjustment), and was nothing reported in the Market Discount field of the 1099-INT?]

Most states exempt accrued market discount interest on treasury securities from taxation, but I can't speak to MA specifically.

1099-INT has 0.00 under Market Discount
On Form 1099-B the $1200 gain is listed under column 1f Accrued Market Discount. The amount shows up later in the same form as Box D Long Term Realized Gain.

[ofckrupke]

Since the 1099-B does peg the accrued market discount correctly in 1f, odds are (if you're using tax software) that it will correctly interpret the form if imported, and that form 8949 part 2 and schedules B and D should end up populated with correct entries. If you're filling forms in by hand then follow the IRS instructions for the various forms/schedules in my outline above. Note that the column g adjustment on the 8949 is entered as a negative quantity.

[gatorking]

Since the 1099-B does peg the accrued market discount correctly in 1f, odds are (if you're using tax software) that it will correctly interpret the form if imported, and that form 8949 part 2 and schedules B and D should end up populated with correct entries. If you're filling forms in by hand then follow the IRS instructions for the various forms/schedules in my outline above. Note that the column g adjustment on the 8949 is entered as a negative quantity.

I have H&R Block pulling in the forms from Fidelity. The amount is going on Schedule D, line 8a. Form 8949 is empty.

[ofckrupke]

I have H&R Block pulling in the forms from Fidelity. The amount is going on Schedule D, line 8a. Form 8949 is empty.

And line 8a column (h) is/includes the ~$1200 figure? If so then that's messed up.
Dunno, though, whether the blame goes to Fidelity, to HRBlock, or they'd both point the finger at you for missing an opportunity to adjust via interview, since my direct experience is tax forms by hand and 1099s from Schwab and Vanguard.

But if the number in column (h) is the sum of LT gains for other dispositions with zero contribution from the matured note 912828YV6, and there's a ~$1200 AMD adjustment on Schedule B that you can attribute to this note, then it's OK that the transaction was integrated into line 8a of Schedule D without generation of a 8949 with box D marked. Instructions and form 8949 itself make this clear. What can be less clear, especially if you have a bunch of other Schedule D reportable dispositions, is whether the software has actually parsed, interpreted, and merged everything correctly...unless you do the arithmetic yourself as well to verify.
My practice is to flow debt security dispositions involving AMD through 8949 and itemize the adjustments there with a line for each disposition.

This post and the discussion that follows in the "Taxation of Treasury bills, notes and bonds" megatopic may help as it also involves H&R Block, Fidelity, and an issue with AMD reporting. Because its an omnibus topic you'll have to skip over some posts unrelated to the poster's specific issue.

[FactualFran]

1099-INT has 0.00 under Market Discount
On Form 1099-B the $1200 gain is listed under column 1f Accrued Market Discount. The amount shows up later in the same form as Box D Long Term Realized Gain.

The 1099-INT does not have a market discount because you did not opt to accrue the discount over each tax year you owned the Note. Because that option was not used, the entire discount amount is reported on the 1099-B generated for the maturity of the Note.

An indication on a Form 1099-B that an income tax return is to include a Form 8949 with box D checked means that the transaction was a long-term one and the basis was reported to the IRS. The Form 8949 should contain a row for the matured Note with the Proceeds, Basis, Adjustment Type of "D", and an Adjustment amount of -1,200. The gain or loss column should be 0 (proceeds minus basis plus adjustment amount).

I don't know what has to be done to have H&R Block produce a correct Form 8849. The income tax return should also include a Schedule B with line 1 (interest) having an Accrued Market Discount row that includes the 1,200 from the transaction.

[sorka]

I had several t-notes that matured last year. Box 3 of my 1099-Int had the interest payments for these notes. Box 1f had AMD which included the entire difference between face value and the price paid rather than OID - price paid.

The first question: is the AMD taxable in CA even though the IRS treated this as interest on my federal taxes? In the end, this 1f amount did not make it into the column b exclusions on the CA Interest and Dividend Adjustments Worksheet Line 1 and did not appear on any line.

Again, the 1f amount is still considered interest 8949 with a code D. These notes were held to maturity.

Secondly, if should not be considered taxable by California, where should the correction be made? I've seen TT Employee tax experts in the intuit form state that you should transfer the 1f amount to the Box 3 in the 1099 but that would result in stating a different box 3 amount than the feds get on their copy even though it doesn't change the federal tax.

Others claimed they did an AMD adjustment on Line 12 of the CA Interest and Dividend Adjustments Worksheet.

[gatorking]

I have H&R Block pulling in the forms from Fidelity. The amount is going on Schedule D, line 8a. Form 8949 is empty.

And line 8a column (h) is/includes the ~$1200 figure? If so then that's messed up.
Dunno, though, whether the blame goes to Fidelity, to HRBlock, or they'd both point the finger at you for missing an opportunity to adjust via interview, since my direct experience is tax forms by hand and 1099s from Schwab and Vanguard.

But if the number in column (h) is the sum of LT gains for other dispositions with zero contribution from the matured note 912828YV6, and there's a ~$1200 AMD adjustment on Schedule B that you can attribute to this note, then it's OK that the transaction was integrated into line 8a of Schedule D without generation of a 8949 with box D marked. Instructions and form 8949 itself make this clear. What can be less clear, especially if you have a bunch of other Schedule D reportable dispositions, is whether the software has actually parsed, interpreted, and merged everything correctly...unless you do the arithmetic yourself as well to verify.
My practice is to flow debt security dispositions involving AMD through 8949 and itemize the adjustments there with a line for each disposition.

This post and the discussion that follows in the "Taxation of Treasury bills, notes and bonds" megatopic may help as it also involves H&R Block, Fidelity, and an issue with AMD reporting. Because its an omnibus topic you'll have to skip over some posts unrelated to the poster's specific issue.

Thanks. The post you linked to and a few below that cleared it up for me.

[WalkingBackToHouston]

I see this as an important thread. Thanks for starting it. Perhaps it should be sticky?
And thanks to all contributors here. I have added a couple of checkpoints to my taxes every year.

Glad you're finding it useful. I don't know what the process is to make a thread sticky, but you could always PM a moderator and ask.

I sent suggestion via PM to admin

[Artsdoctor]

I had several t-notes that matured last year. Box 3 of my 1099-Int had the interest payments for these notes. Box 1f had AMD which included the entire difference between face value and the price paid rather than OID - price paid.

The first question: is the AMD taxable in CA even though the IRS treated this as interest on my federal taxes? In the end, this 1f amount did not make it into the column b exclusions on the CA Interest and Dividend Adjustments Worksheet Line 1 and did not appear on any line.

Again, the 1f amount is still considered interest 8949 with a code D. These notes were held to maturity.

Secondly, if should not be considered taxable by California, where should the correction be made? I've seen TT Employee tax experts in the intuit form state that you should transfer the 1f amount to the Box 3 in the 1099 but that would result in stating a different box 3 amount than the feds get on their copy even though it doesn't change the federal tax.

Others claimed they did an AMD adjustment on Line 12 of the CA Interest and Dividend Adjustments Worksheet.

I spoke with the CA FTB years ago about this and then asked my CPA how he handles this. CA conforms with federal interpretation: AMD is interest which is not taxed at the state level. Capital gains at the federal level are capital gains at the state level. CA is pretty straightforward on this--other states appear to be silent but the default is probably the same unless there are tax laws to the contrary.

You adjust for this on your California Schedule CA. However, our taxes are always formally filed by the accountant so I can't tell you exactly how to enter this on your TurboTax software to make sure it's correct. I know that sometimes posters in NY have remarked that the workaround wasn't all that straightforward so just double-check whenever you think you've finished to make sure it's correct.

[LadyGeek]

Glad you're finding it useful. I don't know what the process is to make a thread sticky, but you could always PM a moderator and ask.

I sent suggestion via PM to admin

Suggestion received. Sure. This thread is now a 'sticky' at the top of the Investing - Theory, News & General forum (where you see it now).

[Kevin M]

I had several t-notes that matured last year. Box 3 of my 1099-Int had the interest payments for these notes. Box 1f had AMD which included the entire difference between face value and the price paid rather than OID - price paid.

The first question: is the AMD taxable in CA even though the IRS treated this as interest on my federal taxes? In the end, this 1f amount did not make it into the column b exclusions on the CA Interest and Dividend Adjustments Worksheet Line 1 and did not appear on any line.

Again, the 1f amount is still considered interest 8949 with a code D. These notes were held to maturity.

Secondly, if should not be considered taxable by California, where should the correction be made? I've seen TT Employee tax experts in the intuit form state that you should transfer the 1f amount to the Box 3 in the 1099 but that would result in stating a different box 3 amount than the feds get on their copy even though it doesn't change the federal tax.

Others claimed they did an AMD adjustment on Line 12 of the CA Interest and Dividend Adjustments Worksheet.

I use HRB, and with that we need to enter the AMD adjustment amount in a dummy 1099-INT, so I put it in box 3 to ensure it is included in subtractions on CA Form 540.

In HRB there is a Schedule CA (540) mini-worksheet for Taxable Interest Income Subtractions. Line a shows US Treasury Interest, and line b allows an entry for Other Subtractions non included in line a, and this is where I'd enter the AMD interest adjustment. Line c is the total of a + b, and is entered in Column B (subtractions) of Line 2 Taxable Interest Income.

If the TT worksheet entry you mention affects the subtraction amount on Line 2 of Schedule CA, then that's what I'd use.

[sorka]

I use HRB, and with that we need to enter the AMD adjustment amount in a dummy 1099-INT, so I put it in box 3 to ensure it is included in subtractions on CA Form 540.

In HRB there is a Schedule CA (540) mini-worksheet for Taxable Interest Income Subtractions. Line a shows US Treasury Interest, and line b allows an entry for Other Subtractions non included in line a, and this is where I'd enter the AMD interest adjustment. Line c is the total of a + b, and is entered in Column B (subtractions) of Line 2 Taxable Interest Income.

If the TT worksheet entry you mention affects the subtraction amount on Line 2 of Schedule CA, then that's what I'd use.

Thanks for the reply. If I use a dummy 1099-INT to report the 1099-B 1f AMD as interest instead, it all flows to the 540 worksheets. I've seen some who said this is how they handled it. My preference would be for this as it doesn't change the federal amount and the adjustment is done before it transfers to CA which means not having to override anything on the CA return. However, it does mean reporting more box 3 interest than what is actually reported to the feds and removing the Code D amounts in the Capital Gain (Loss) Adjustment Worksheet(s) for each of the transactions that were added to box 1f otherwise you get double taxed on that interest. I can't see any other way to make this adjustment.

If I do it on the CA side instead, it's just a single entry on line 12 column b of the Interest and Dividend Adjustments Worksheet which I labeled "AMD Adjustment Fed Obligations Held to Maturity".

However, not really sure if that's going to fly with the FTB.

[LadyGeek]

I merged gatorking's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)

[sorka]

In HRB there is a Schedule CA (540) mini-worksheet for Taxable Interest Income Subtractions. Line a shows US Treasury Interest, and line b allows an entry for Other Subtractions non included in line a, and this is where I'd enter the AMD interest adjustment. Line c is the total of a + b, and is entered in Column B (subtractions) of Line 2 Taxable Interest Income.

If the TT worksheet entry you mention affects the subtraction amount on Line 2 of Schedule CA, then that's what I'd use.

This is the same as the Interest and CA Dividend Adjustments Worksheet method I mentioned earlier. In the Interest and Dividend Adjustments Worksheet, Line 12"Other Adjustments (itemize)" in the Interest Income Adjustments section, adding the box 1f amount to this results in that amount carrying over to the Schedule CA column B (subtractions), so this is exactly what I did but using the Interest and Dividend Adjustments Worksheet upstream. Doing this doesn't require adding a dummy 1099-INT and offsetting cap gains with Code D adjustment to turn it into interest on the fed return. i.e. you'd do either this or the CA adjustment but not both.

Interestingly enough, the Interest and Dividend Adjustments Worksheet is not part of the filing. Only the Schedule CA is so the itemizing and the reason for it is just for archiving and if you ever get audited.

[TOM1964]

I spoke with the CA FTB years ago about this and then asked my CPA how he handles this. CA conforms with federal interpretation: AMD is interest which is not taxed at the state level. Capital gains at the federal level are capital gains at the state level. CA is pretty straightforward on this--other states appear to be silent but the default is probably the same unless there are tax laws to the contrary.

In Vermont, the law reads:

"Income from United States government obligations does not include income from the
following:
-- Gains from the sale or exchange of such obligations."

Does this sound like AMD is taxed? The tax letter that governs the issue does not specifically say. I just downloaded my 1099 straight from Schwab and did not modify it for my Vermont return. I'm wondering if I overpaid, but I can't make it through all 27 pages of this thread.

Cheers, T

https://tax.vermont.gov/sites/tax/files ... 202014.pdf

[Kevin M]

I use HRB, and with that we need to enter the AMD adjustment amount in a dummy 1099-INT, so I put it in box 3 to ensure it is included in subtractions on CA Form 540.

In HRB there is a Schedule CA (540) mini-worksheet for Taxable Interest Income Subtractions. Line a shows US Treasury Interest, and line b allows an entry for Other Subtractions non included in line a, and this is where I'd enter the AMD interest adjustment. Line c is the total of a + b, and is entered in Column B (subtractions) of Line 2 Taxable Interest Income.

If the TT worksheet entry you mention affects the subtraction amount on Line 2 of Schedule CA, then that's what I'd use.

Thanks for the reply. If I use a dummy 1099-INT to report the 1099-B 1f AMD as interest instead, it all flows to the 540 worksheets. I've seen some who said this is how they handled it. My preference would be for this as it doesn't change the federal amount and the adjustment is done before it transfers to CA which means not having to override anything on the CA return. However, it does mean reporting more box 3 interest than what is actually reported to the feds and removing the Code D amounts in the Capital Gain (Loss) Adjustment Worksheet(s) for each of the transactions that were added to box 1f otherwise you get double taxed on that interest. I can't see any other way to make this adjustment.

If I do it on the CA side instead, it's just a single entry on line 12 column b of the Interest and Dividend Adjustments Worksheet which I labeled "AMD Adjustment Fed Obligations Held to Maturity".

However, not really sure if that's going to fly with the FTB.

I would be fine with it.

I recently had a gratifying experience with the FTB, and although it was related to munis rather than Treasuries, it was a similar type of issue. In 2019 I was invested in a bunch of munis, including many non-CA munis. I included the amortized bond premium (ABP) as a subtraction from non-CA muni interest income for CA tax purposes. Early last year I received an FTB assessment for additional taxes on the ABP amount, and I submitted a dispute for it. Early this year (yeah, it took about a year) I received a call from a very nice woman at the FTB regarding my dispute. The first question I asked her was whether or not she understood amortized bond premiums, and she immediately replied that she did; I was impressed. She said that she just needed the 1099s showing the ABP, and a few weeks after I provided those to her, they reversed the assessment for additional taxes.

As a side note, the FTB upload capability did not work to submit the 1099s. It appeared to work on my end, but on her end she saw nothing or something that was unreadable, so she sent me an email that I replied to with the attachments, and that worked. She stayed on the line as we worked through all of this, until she received the documents.

[Kevin M]

I spoke with the CA FTB years ago about this and then asked my CPA how he handles this. CA conforms with federal interpretation: AMD is interest which is not taxed at the state level. Capital gains at the federal level are capital gains at the state level. CA is pretty straightforward on this--other states appear to be silent but the default is probably the same unless there are tax laws to the contrary.

In Vermont, the law reads:

"Income from United States government obligations does not include income from the
following:
-- Gains from the sale or exchange of such obligations."

Does this sound like AMD is taxed? The tax letter that governs the issue does not specifically say. I just downloaded my 1099 straight from Schwab and did not modify it for my Vermont return. I'm wondering if I overpaid, but I can't make it through all 27 pages of this thread.

Cheers, T

https://tax.vermont.gov/sites/tax/files ... 202014.pdf

No, it does not sound like Treasury AMD is taxed, since AMD is not treated as a capital gain, but as interest income. What would be taxed was anything that was left after the AMD adjustment.

[sorka]

I spoke with the CA FTB years ago about this and then asked my CPA how he handles this. CA conforms with federal interpretation: AMD is interest which is not taxed at the state level. Capital gains at the federal level are capital gains at the state level. CA is pretty straightforward on this--other states appear to be silent but the default is probably the same unless there are tax laws to the contrary.

In Vermont, the law reads:

"Income from United States government obligations does not include income from the
following:
-- Gains from the sale or exchange of such obligations."

Does this sound like AMD is taxed? The tax letter that governs the issue does not specifically say. I just downloaded my 1099 straight from Schwab and did not modify it for my Vermont return. I'm wondering if I overpaid, but I can't make it through all 27 pages of this thread.

Cheers, T

https://tax.vermont.gov/sites/tax/files ... 202014.pdf

It depends on how the treasuries were disposed of. If you hold them to maturity, the 1f AMD is Code D converted from cap gains to interest income on your federal return which if it's from federal obligations can't be taxed by any state. If you sold them before they matured, then it's just straight capital gains except any interest paid directly by the feds while you held the notes or bonds. Bills always get added to box 3 so those are the least confusing.

[FactualFran]

It depends on how the treasuries were disposed of. If you hold them to maturity, the 1f AMD is Code D converted from cap gains to interest income on your federal return which if it's from federal obligations can't be taxed by any state. If you sold them before they matured, then it's just straight capital gains except any interest paid directly by the feds while you held the notes or bonds. Bills always get added to box 3 so those are the least confusing.

It is not "just straight capital gains" when sold before maturity. When a market discount bond is sold before maturity, the discount is accrued to the date of the sale and that amount is taxed as income. The capital gain as a result of the sale is equal to the proceeds of the sale minus the basis with the basis being increased by the accrued market discount.

According to a Market Discont Bonds section of IRS Publication 550:

When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply.

• You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the accrued market discount. See Discounted Debt Instruments, later.
• You must treat any partial payment of principal on the bond as ordinary interest income, up to the amount of the accrued market discount. See Partial principal payments, later in this discussion.
• If you borrow money to buy or carry the bond, your deduction for interest paid on the debt is limited. See Limit on interest deduction for market discount bonds, later.

Those who choose to accrue the market discount over the period the bond is owner, accrue the discount every year the bond is held rather than only when the bond is disposed.

[sorka]

It is not "just straight capital gains" when sold before maturity. When a market discount bond is sold before maturity, the discount is accrued to the date of the sale and that amount is taxed as income. The capital gain as a result of the sale is equal to the proceeds of the sale minus the basis with the basis being increased by the accrued market discount.

Hmm, so your saying there's still a box 1f amount which gets converted to interest but the face value minus the AMD amount is now just straight capital gains? I guess short term, that's still lower taxes since the interest portion which was AMD is not taxed by the state but the capital gains portion is taxed short term by both fed and state?

[FactualFran]

Hmm, so your saying there's still a box 1f amount which gets converted to interest but the face value minus the AMD amount is now just straight capital gains? I guess short term, that's still lower taxes since the interest portion which was AMD is not taxed by the state but the capital gains portion is taxed short term by both fed and state?

The face value minus the AMD is not the capital gain. The capital gain is the proceeds minus the basis with adjustments. AMD is one of the possible adjustments. The proceeds at maturity will be equal to the face value.

Whether a capital gain is long-term or short-term depends on how long the security was held. Whether the security was purchased with a discount does not change the holding period.

Different states have used different income tax treatments with discount and capital gain from a United States Government Obligation (USGO). A standard treatment seems to be that (1) income from a USGO that is included as interest in federal taxable income is excluded from state taxable income and (2) capital gain from a USGO are taxed as any other capital gains. Not all states necessarily use that treatment.

[buddysam1]

Just a note about personal experience with TT vs FreeTaxUSA treatment of AMD.
I entered my Schwab 1099-B info with box 1f info for Treasuries held to maturity. TT did not process it correctly and I wasn't interested in jumping through the hoops so I ran the same info in FreeTaxUSA. It correctly treated the AMD as interest income both on the Federal return and the SC return. So for me a free program worked better than the paid program.

[Artsdoctor]

Hmm, so your saying there's still a box 1f amount which gets converted to interest but the face value minus the AMD amount is now just straight capital gains? I guess short term, that's still lower taxes since the interest portion which was AMD is not taxed by the state but the capital gains portion is taxed short term by both fed and state?

The face value minus the AMD is not the capital gain. The capital gain is the proceeds minus the basis with adjustments. AMD is one of the possible adjustments. The proceeds at maturity will be equal to the face value.

Whether a capital gain is long-term or short-term depends on how long the security was held. Whether the security was purchased with a discount does not change the holding period.

Different states have used different income tax treatments with discount and capital gain from a United States Government Obligation (USGO). A standard treatment seems to be that (1) income from a USGO that is included as interest in federal taxable income is excluded from state taxable income and (2) capital gain from a USGO are taxed as any other capital gains. Not all states necessarily use that treatment.

Somehow, this comment needs to be placed on Page One of this thread, and then at the beginning of each page thereafter. Clear, concise, and beneficial year after year after year.