What are the various types of interest? What are nominee and accrued interest? What is an OID adjustment?

Most taxpayers simply enter the information reported on their Forms 1099-INT or 1099-OID and move on. However, certain situations require an adjustment to the amount of interest income reported on your tax return.

If you're not sure whether one of these adjustments applies to you, contact the financial institution that issued the form or review the instructions provided with the form. In some cases, the IRS may also be able to help clarify how the income should be reported.

Nominee interest is interest income that was reported under your name but actually belongs to someone else.

This commonly happens when a bank account, bond, or other investment is held jointly, but the Form 1099 is issued to only one person.

In this situation:

The adjustment prevents you from being taxed on income that isn't actually yours.

OID stands for Original Issue Discount.

An original issue discount occurs when a bond is issued for less than its face value (also called its principal amount). The difference between the issue price and the amount you'll receive at maturity is generally considered interest income that must be recognized over the life of the bond.

For example:

Generally, you'll receive Form 1099-OID showing the amount that must be reported as income for the year.

You may need to adjust the amount reported on Form 1099-OID if:

If your taxable OID income is less than the amount reported on Form 1099-OID, you typically:

Because OID rules can be complex, you may need to consult IRS Publication 1212, Guide to Original Issue Discount (OID) Instruments, when calculating an adjustment.

Accrued interest most often applies when bonds are bought or sold between scheduled interest payment dates.

When you purchase a bond between interest payments, part of the purchase price usually reimburses the seller for interest that accumulated before you owned the bond.

Later, when the bond pays interest, your Form 1099-INT may report the entire interest payment, including the amount that accrued before you bought the bond.

Because that pre-purchase interest belonged to the seller, you can generally reduce your taxable interest income by the amount of accrued interest you paid when you bought the bond.

Your Form 1099-INT may show the full $100. In many cases, you can report a $50 accrued interest adjustment, leaving only $50 of taxable interest income.

ABP stands for Amortizable Bond Premium.

A bond premium occurs when you pay more for a bond than its face value, often because the bond pays a higher interest rate than current market rates.

Rather than recovering the premium when the bond matures or is sold, you may be able to amortize the premium over the life of the bond.

Suppose you purchase a bond for $550 that will pay $500 at maturity.

If the bond has a 10-year life, you may be able to amortize approximately $5 of premium each year. That amount generally reduces the taxable interest income associated with the bond.

Amortizable bond premium generally applies only to bonds that produce taxable interest income. If the bond produces tax-exempt interest, different rules apply.

Most taxpayers won't need to enter nominee interest, accrued interest, OID adjustments, or amortizable bond premium adjustments. However, if you own bonds, receive Form 1099-OID, hold joint investments, or purchase investments between interest payment dates, one of these adjustments may apply. Reporting these items correctly helps ensure you're taxed only on the interest income that actually belongs to you.