If you've bought or sold a bond between interest payment dates, you may have encountered accrued interest. Understanding how accrued interest works can help ensure you report your interest income correctly on your tax return.
Accrued interest is interest that has been earned but has not yet been paid. When a bond is sold between interest payment dates, the buyer typically pays the seller for the interest that accrued while the seller owned the bond. As a result, part of the interest reported on the bond may actually belong to the seller rather than the buyer.
How Is Accrued Interest Taxed?
The seller is generally responsible for paying tax on the interest earned up to the date of the sale. The buyer is responsible for paying tax only on the interest earned after purchasing the bond.
You may receive Form 1099-INT reporting the total interest paid on the bond during the year. The amount shown on the form may include accrued interest that was paid to the seller when you purchased the bond.
If you paid accrued interest as the buyer, you can generally reduce your taxable interest income by that amount. This adjustment ensures that you're taxed only on the interest you actually earned while you owned the bond.
How Do I Report Accrued Interest in the Program?
- Go to Federal.
- Select Income – Select My Forms.
- Choose 1099-INT, DIV, OID.
- Answer Yes to the question: "Did you earn any interest or dividend income from a bank, brokerage firm, or other financial institution?"
- Select Interest Income (Form 1099-INT).
- Enter your Form 1099-INT information, including any accrued interest adjustment when prompted.