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Noncovered Bond Premium on Treasury Obligations


peggysioux5

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Taxpayer has interest on Treasury obligations reported in box 3 of 1099-INT.  No entry in box 12, bond premium on treasury obligations.  However, in details of the 1099 Consolidated, financial institution shows “noncovered bond premium on treasury obligations” with a note that “these amounts are not reported to IRS but may affect your tax return.”

I know that covered bond premiums listed in box 12 will reduce the interest noted in box 3.  How does noncovered bond premiums of treasury obligations come into play?

Peggy Sioux

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I know that with covered securities, if the premium IS being amortized, that box would only be blank if the interest income is already reported net of the amortization, otherwise the 1099 shows the two amounts.

Because it's noncovered, the brokers weren't required to track basis or report it to IRS, and IF the premium is being amortized, it reduces basis as well as the interest income.  I think that is why you see it as a supplemental item and not on the 1099 itself.  Amortizing is not mandatory except for tax-exempt bonds, so the taxpayer had a choice whether or not to amortize the premium. Once elected though, the taxpayer must amortize for the year of election and all years thereafter unless the IRS gives consent to stop.  Do you know whether the premium was being amortized in prior years, and if so, is the broker is tracking and adjusting basis for the noncovered investments?

Pub 550 describes the methods of amortizing, depending on when the bond was purchased, and how to deal with amortization that exceeds the interest from the bond for the year.

 

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On 3/31/2021 at 7:14 PM, cbslee said:

Pub 537

 

8 hours ago, jklcpa said:

I know that with covered securities, if the premium IS being amortized, that box would only be blank if the interest income is already reported net of the amortization, otherwise the 1099 shows the two amounts.

Because it's noncovered, the brokers weren't required to track basis or report it to IRS, and IF the premium is being amortized, it reduces basis as well as the interest income.  I think that is why you see it as a supplemental item and not on the 1099 itself.  Amortizing is not mandatory except for tax-exempt bonds, so the taxpayer had a choice whether or not to amortize the premium. Once elected though, the taxpayer must amortize for the year of election and all years thereafter unless the IRS gives consent to stop.  Do you know whether the premium was being amortized in prior years, and if so, is the broker is tracking and adjusting basis for the noncovered investments?

Pub 550 describes the methods of amortizing, depending on when the bond was purchased, and how to deal with amortization that exceeds the interest from the bond for the year.

 

Previous tax return shows no amortization or ABP adjustment and taxpayer isn't aware of amortization in prior years.  Excuse my ignorance, but why would a taxpayer not want to reduce the annual interest each year by amortizing?  If there is no amortization each year, is there an adjustment at maturity being taxpayer did not amortize?

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If there are other bonds in the portfolio for which the election was made, or if there are taxable bonds that are "covered securities" for which the amortization is being deducted against the interest income, then that constitutes the "election" to amortize.  The choice covers all bonds held; one cannot pick and choose which to apply the rule.

If amortizing and reducing the interest income, then basis is reduced.  If not amortizing, then basis is not reduced.  This is so that someone amortizing can't double dip by reducing the earnings and claiming the higher basis at disposition.

You might be interested to read this blog post that came out around the time the brokers' reporting rules changed. It describes this issue and the problems of amortizing when a portfolio includes noncovered and covered bonds that are being amortized: https://tscpafederal.typepad.com/blog/2015/01/problems-with-new-irs-bond-premium-amortization-rules.html

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3 hours ago, jklcpa said:

If there are other bonds in the portfolio for which the election was made, or if there are taxable bonds that are "covered securities" for which the amortization is being deducted against the interest income, then that constitutes the "election" to amortize.  The choice covers all bonds held; one cannot pick and choose which to apply the rule.

If amortizing and reducing the interest income, then basis is reduced.  If not amortizing, then basis is not reduced.  This is so that someone amortizing can't double dip by reducing the earnings and claiming the higher basis at disposition.

You might be interested to read this blog post that came out around the time the brokers' reporting rules changed. It describes this issue and the problems of amortizing when a portfolio includes noncovered and covered bonds that are being amortized: https://tscpafederal.typepad.com/blog/2015/01/problems-with-new-irs-bond-premium-amortization-rules.html

Thank you so much for providing the above link.  Very informative and helpful.

Peggy Sioux

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