OID for zero-coupon tax-exempt bonds

[MyVeryOwnSelf]

Must one include yearly OID for zero-coupon tax-exempt bonds on form 1040
line 8b?

There's no 1099-OID form for it, but it's reported in the broker's year-end
summary.

 

[removeps-groups]

Must one include yearly OID for zero-coupon tax-exempt bonds on form 1040
line 8b?

Yes. Line 8b affects the taxable portion of social security.
However, if you don't get social security or get it but have so much
income that 85% of it is taxable, then it's probably OK to forget the
calculation. I did for my own return. Tax-free income is also added
to investment income and may disqualify you from the EITC, where if
your investment income is over $2,950 you don't get EITC. And if you
live in one state but own a muni from another that was bought at a
discount, then the tax-exempt interest is actually taxable in the
state you live in. The tax-free income might affect other parts of
the tax return that I don't know of. And it might affect other non-
tax things like qualification for student loans/grants (ie. more
income would disqualify you), but I know nothing about these.

 

[Arthur Kamlet]

Yes. Line 8b affects the taxable portion of social security.
However, if you don't get social security or get it but have so much
income that 85% of it is taxable, then it's probably OK to forget the
calculation. I did for my own return. Tax-free income is also added
to investment income and may disqualify you from the EITC, where if
your investment income is over $2,950 you don't get EITC. And if you
live in one state but own a muni from another that was bought at a
discount, then the tax-exempt interest is actually taxable in the
state you live in. The tax-free income might affect other parts of
the tax return that I don't know of. And it might affect other non-
tax things like qualification for student loans/grants (ie. more
income would disqualify you), but I know nothing about these.

Tax exempt interest adds to mAGI when calculating the Medicare B
surcharge.

 

[removeps-groups]

Tax exempt interest adds to mAGI when calculating the Medicare B
surcharge.

And one more, which I saw in my software program: The sales tax
deduction from the table method asks to add your taxable and non-
taxable income to arrive at total income, and the sales tax deduction
from the table method is based on this total income.

 

[MyVeryOwnSelf]

Must one include yearly OID for zero-coupon tax-exempt bonds on form

Yes. ...

Then the puzzling thing to me is why it isn't included in form 1044-INT
line 8.

 

[Dan Lanciani]

| >> Must one include yearly OID for zero-coupon tax-exempt bonds on form
| >> 1040 line 8b?
|
| > Yes. ...
|
| Then the puzzling thing to me is why it isn't included in form 1044-INT
| line 8.

The phase-in of exempt interest reporting on 1099-INT was (IIRC) over a
few years. Tax-exempt OID was not included in the initial requirement
but is coming soon I think unless the financial industry raises some
objections.

The new reporting does (IMHO) raise some practical issues. Before there
was any reporting of exempt interest on 1099-INT I made the same
adjustments to tax-exempt interest that I did for normal interest before
reporting it on 8b. In my case the only substantial adjustment was
accrued interest paid on purchase which of course reduces the total
reported. Since the new reporting on 1099-INT I have simply been entering
the total of the 1099-INT exempt values on 8b on the theory that they want
a match. This does not hurt me because there is nothing (yet) in my taxes
that is affected by over-reporting exempt interest. Eventually I expect
there will be an exempt interest version of schedule B to reconcile the
adjustments.

The other interesting issue is how exempt OID reporting will interact
with basis reporting. Currently Fidelity tracks basis voluntarily
and I've observed that while they adjust the basis of my munis down
to account for amortized premium they do not in general adjust it up
for accrued OID. When both OID and basis reporting become mandatory
I assume they will have to at least be consistent.

Dan Lanciani
[email protected]*com