State of Israel Zero Coupon Bonds

[D.D. Palmer]

I own some State of Israel Zero Coupon Bonds that accrue
taxable interest every year. I realized recently that my
brokerage does not include that accrued amount on my 1099.
Frankly they don't have a clue about how these bonds work
and I hate to rock the boat with them but would rather just
do the honest thing on my own. Someday, however, I suspect
they'll figure it out and send amended Form 1099s that could
require amended returns, etc. A headache I'd rather avoid.

My plan is to calculate the accrued amounts and enter that
total on schedule "B". My fear is that if I just ignore it,
someday I'll either have to pay the tax all at once, plus
maybe interest and penalties. I could contact the brokerage
but, frankly, I'd rather not hassle and just cover my butt
myself. Does this make sense? If they do ever figure out
what's going on, I'll have my old tax returns as proof that
I already paid the tax, even though it might not have been
reported by the brokerage to the IRS along the way.

 

[Bob Sandler]

I own some State of Israel Zero Coupon Bonds that accrue

taxable interest every year. I realized recently that my
brokerage does not include that accrued amount on my 1099.
Frankly they don't have a clue about how these bonds work
and I hate to rock the boat with them but would rather just
do the honest thing on my own. Someday, however, I suspect
they'll figure it out and send amended Form 1099s that could
require amended returns, etc. A headache I'd rather avoid.

My plan is to calculate the accrued amounts and enter that
total on schedule "B". My fear is that if I just ignore it,
someday I'll either have to pay the tax all at once, plus
maybe interest and penalties. I could contact the brokerage
but, frankly, I'd rather not hassle and just cover my butt
myself. Does this make sense? If they do ever figure out
what's going on, I'll have my old tax returns as proof that
I already paid the tax, even though it might not have been
reported by the brokerage to the IRS along the way.

The Bank of New York, which is the agent for State of Israel
Bonds, sends out a 1099-OID each year showing the amount of
interest that you have to report. I don't know how this
works if a broker is holding the bonds for you - whether
they should be sending the 1099-OID directly to you, or to
the broker, who should pass it on to you. As painful as it
might be, I think you have to talk to the broker about it.
You could first try calling the Israel Bonds office at the
Bank of New York, at 866-764-3425, and see if they can help
you.

If you try to calculate it yourself I think it's unlikely
that you will come up with the right amount. I was never
able to make sense of the yearly amounts on the 1099-OIDs,
though they added up to the correct total at maturity.
Apparently, for some reason, it is a little different from a
standard interest calculation.

By the way, I have not gotten the 1099-OID yet for this
year, so it is possible they are a little late sending them
out.

For the future, you should consider having any new bonds
that you buy registered in your own name instead of the
broker. They are all issued in book entry form now. There is
no actual certificate to worry about. I don't know if you
could have the existing bonds transferred to your name. You
could ask BONY about that, too, if you call them.

Bob Sandler
not a tax professional

 

[Benjamin Yazersky CPA]

I own some State of Israel Zero Coupon Bonds that accrue
taxable interest every year. I realized recently that my
brokerage does not include that accrued amount on my 1099.
Frankly they don't have a clue about how these bonds work
and I hate to rock the boat with them but would rather just
do the honest thing on my own. Someday, however, I suspect
they'll figure it out and send amended Form 1099s that could
require amended returns, etc. A headache I'd rather avoid.

My plan is to calculate the accrued amounts and enter that
total on schedule "B". My fear is that if I just ignore it,
someday I'll either have to pay the tax all at once, plus
maybe interest and penalties. I could contact the brokerage
but, frankly, I'd rather not hassle and just cover my butt
myself. Does this make sense? If they do ever figure out
what's going on, I'll have my old tax returns as proof that
I already paid the tax, even though it might not have been
reported by the brokerage to the IRS along the way.

You might want to contact the State of Israel Bonds office
directly. They probably could help you with the interest
calculations.

I've had problems in the past with brokerage houses not
really wanting to deal with Israeli bonds, because of
commission issues. (they make more selling other bonds)

 

[Jay]

I own some State of Israel Zero Coupon Bonds that accrue
taxable interest every year. I realized recently that my
brokerage does not include that accrued amount on my 1099.
Frankly they don't have a clue about how these bonds work
and I hate to rock the boat with them but would rather just
do the honest thing on my own. Someday, however, I suspect
they'll figure it out and send amended Form 1099s that could
require amended returns, etc. A headache I'd rather avoid.

My plan is to calculate the accrued amounts and enter that
total on schedule "B". My fear is that if I just ignore it,
someday I'll either have to pay the tax all at once, plus
maybe interest and penalties. I could contact the brokerage
but, frankly, I'd rather not hassle and just cover my butt
myself. Does this make sense? If they do ever figure out
what's going on, I'll have my old tax returns as proof that
I already paid the tax, even though it might not have been
reported by the brokerage to the IRS along the way.

I presume that the bonds are not in an IRA or other
tax-deferred account.

For comparison, some people deal directly with the U.S.
administrators for the bonds
(https://www.israelbondholders.com/) rather than with a
brokerage. The administrators mail out forms 1099-OID each
year. How these forms apply to tax returns is well
documented.

I don't know if this helps you or not. If this is the first
year for you, maybe you'll still receive forms 1099-OID in
the mail. Some were mailed out recently. Or maybe you can
use the web site to obtain the information you need by
opening a web account at the web site. (How you could
"calculate the accrued amounts" yourself is not obvious at
all.) Maybe you can transfer your bonds to a book account at
israelbondholders.com.

 

[D.D. Palmer]

D.D. Palmer wrote:

I presume that the bonds are not in an IRA or other
tax-deferred account.

For comparison, some people deal directly with the U.S.
administrators for the bonds
(https://www.israelbondholders.com/) rather than with a
brokerage. The administrators mail out forms 1099-OID each
year. How these forms apply to tax returns is well
documented.

I don't know if this helps you or not. If this is the first
year for you, maybe you'll still receive forms 1099-OID in
the mail. Some were mailed out recently. Or maybe you can
use the web site to obtain the information you need by
opening a web account at the web site. (How you could
"calculate the accrued amounts" yourself is not obvious at
all.) Maybe you can transfer your bonds to a book account at
israelbondholders.com.

Calculating the accrued amounts is easy. Just figure what I
paid for the bonds and what they will be worth at maturity
in 10 years from inception. The using an Excel spreadsheet,
it's easy to calculate the rate at which they accrue
interest and to creat a schedule of each bond's value on
each December 31st. The change in annual value is the OID
for that year.