Accrued Interest Tax Free Municipal Bonds

Forum|Forum|1 year ago
January 29, 2025
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I know how to adjust for accrued interest on taxable bonds but do not know how to do that on tax free Municipal bonds within Turbotax. I purchased numerous tax free municipal bonds from various states in 2024. On each one I paid accrued interest. I will do a direct download into Turbo Tax from my brokerage company for interest, dividends and capital gains. How do I adjust the tax free interest in Turbo Tax to account for the accrued interest I paid on the municipal bonds I purchased? I live in a state that does not have state income tax. I need to do this because tax free interest is added back into the calculation to determine my Medicare premium.

Ask the Experts - Family Tax II - Jan 2025

Best answer by DianeW777

Once your 1099-INTs are downloaded, report the accrued interest as an adjustment shown below. There you can make your adjustment for the portion of accrued interest you paid at purchase. You are not required to report this portion as interest income. Instead you add it to the cost basis of your bonds.

Since you are reporting Interest income on a bond that had accrued interest at the time you purchased, then you would reduce your interest income by the accrued interest at your purchase date. Enter the full amount of the interest, and then enter the accrued Interest paid as an adjustment to reduce it.

Open your TurboTax return:

Search (upper right) > Type 1099int > Click on the Jump to... link
Enter your interest income > Continue > Select 'I need to adjust the interest reported on my form'
Enter the adjustment amount (accrued interest at purchase) > Select 'My accrued interest is included in this 1099-INT'
This will accomplish the correct taxable income for your return.

DianeW777Answer

Open your TurboTax return:

Search (upper right) > Type 1099int > Click on the Jump to... link
Enter your interest income > Continue > Select 'I need to adjust the interest reported on my form'
Enter the adjustment amount (accrued interest at purchase) > Select 'My accrued interest is included in this 1099-INT'
This will accomplish the correct taxable income for your return.

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richlux

I have a related question that I think I know the answer to. If all the interest is from municipal bonds in my state (e.g. all tax free), I should not deduct the accrued interest, right? This interest is shown in Box 8, Tax-exempt Interest and since I'm not being taxed on it, there's no reason to deduct it.

Thanks,

Rich

dick16Author

While you do not pay federal income tax on interest from tax free municipal bonds, that "tax free" interested is added back into your income when determining annual Medicare premiums. If you do not account for accrued interest, it could place you in the next higher premium bracket, and this additional tax is not necessary if you can correctly enter accrued interest.

asdfl76

how do I do this with the online version? I have both taxable accrued interest and tax exempt accrued interest.

SteamTrain

Employee

@asdfl76

You break out those interest/accrued amounts into their own 1099-INT forms...with the payer/brokerage name of the $$ being the same as on the original.

1) Put box 8 &13 $$ on a separate manually created 1099-INT, and then indicate the accrued interest for those tax-exempt bonds on the follow-up page.

2) Then for the taxable interest, it depends on whether it was for box 1 $$, or box 3 $$, but for either You would create a second 1099-INT with box either box1 & 11 $$ on it, or box 3 & 12 $$ on it...then report the accrued interest for that bond type on the new 1099-INT follow-up page. Of course, the original 1099-INT may only have box 1 (&11) or box 3 (&12) $$ on it now.

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*