How to Report Accrued Interest on a Tax Return

Most bonds pay interest periodically. Accrued interest is the unpaid interest a bondholder earns since the last interest payment. If you buy a bond, the chances are good that the purchase date occurs between interest payment dates, which means the interest accrued since the last payment date up to the day before your bond purchase belongs to the bond seller. As explained in IRS Publication 550, this affects how you file your tax return because you don’t owe taxes on the accrued interest.

Reporting Tax on Accrued Interest

Your broker will send you copies of IRS Form 1099-INT for each bond or interest-bearing account that pays at least $10 of interest for the year. The broker will also report to you the amount of accrued interest, if any, for each bond you purchased during the tax year. If you receive a 1099-INT that includes some accrued interest, you must fill out Schedule B of Form 1040. In Part I of Schedule B, enter the bond seller’s name and, in the “Amount” column, the interest reported in Box 1 of 1099-INT. If part of the bond interest is accrued, add a line with “Nominee Distribution” in the name column and the accrued interest in the Amount column. Write in “Accrued Interest” next to the amount. Sum up the Amount column, subtract the accrued interest amount and report the net total on Line 2 of Schedule B. Apply line 3 if necessary, and write the result on line 4. Transfer the Schedule B line 4 amount to Form 1040 line 8a, which is part of the total income reported on 1040 line 22.

Exceptions to Reporting

You might not receive a 1099-INT for interest amounts under $10. Nonetheless, you must report taxable interest earned if it equals or exceeds 50 cents. If you received no accrued interest for the year and your total interest income was less than $1,500, you might be able to skip Schedule B, but check the IRS instructions, because there are other reasons to complete Schedule B. You don’t report tax-exempt interest on Schedule B, but do report it on Form 1040 line 8b.

2018 Tax Law

The accrued interest reporting procedures for tax years 2017 and 2018 are the same, but the effects on your tax bill differ due to different tax rates resulting from the Tax Jobs and Cuts Act of 2017. For example, suppose you are single and earn taxable income of $75,000 in 2018, including $2,000 in non-accrued interest income. Your federal tax bracket is 22 percent, which means your interest income incurs a federal tax of $2,000 x 0.22, or $440.

2017 Tax Law

The 2017 tax bracket for $75,000 in taxable income for a single filer was 25 percent. You would, therefore, pay $2,000 x 0.25, or $500 on your interest income for the tax year 2017. Tax brackets are annually adjusted for inflation, so the numbers will change with each passing year.

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