Generally, you would know if any of these applied to you. If you are unsure, you should contact either the payer of the interest or the IRS for clarification.
Nominee Interest: Nominee interest is interest that actually belongs to someone else. Sometimes, taxpayers receive a form that is addressed to them, but actually reports income that is taxable to someone else. In cases like this, the taxpayer must first report on his or her return the full amount of the interest. This is because the amount that the individual reports must match what the IRS has on record. However, the taxpayer is then allowed to subtract out the nominee interest. This is because the interest actually belongs to someone else, and is taxable to that person.
OID Adjustment*: OID stands for "original issue discount". OID arises when a bond is issued for a price less than its face value or principal amount. Generally, you should receive a Form 1099-OID for this. OID is the difference between the principal amount (the amount you would receive when the bond matures) and the issue price. Generally, you must claim part of the OID as interest income each year that you hold the bond (whether or not you actually receive payment).
However, the amount that you report on your return must be adjusted if:
- you bought the bond at a premium
- the bond is indexed for inflation
- the obligation is a stripped bond or stripped coupon, or
- you received Form 1099-OID as a nominee for someone else
Generally, if the amount you need to report as income is less than the amount on your Form 1099-OID, you must make an OID Adjustment to reflect this. You would report the full amount first, then subtract out the appropriate amount. This subtracted amount would be your OID Adjustment.
Because these can be complicated, you may need to reference IRS Publication 1212 before making this adjustment.
Accrued Interest: When you buy or sell bonds between interest dates, interest is included in the price of the bonds. This interest is taxable to the seller, not the buyer. When you receive your Form 1099-INT for any interest that was paid on those bonds, it will probably include interest that accrued on the bonds after you purchased them as well as interest that had accrued prior to your purchase and was included in the purchase price. Generally, as the buyer, you can subtract out the interest that you paid as part of the purchase price. Any such amount should be subtracted by entering it as accrued interest.
ABP Adjustment: ABP stands for Amortizable Bond Premium. If you pay a premium (extra) to buy a bond (if the bond is paying a higher rate of interest, for example), the premium is part of your basis in the bond. If your bond produces taxable interest, you can choose to amortize (that is, gradually deduct) the amount of the premium over the life of the bond.
For example, if you paid $550 to buy a bond with a maturity value of $500, you paid a $50 premium. If the life of the bond was 10 years, you could use $5 per year to reduce the amount of taxable interest that is associated with that bond each year. Note: If the bond is yielding nontaxable interest, you wouldn't be able to amortize like this. The amortizable bond premium reduction can only be used if the associated bond is producing taxable interest.
If you would like more information on various types of interest, please review Publication 550.