J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

4.15 Reporting Interest on Bonds Bought or Sold

When you buy or sell bonds between interest dates, interest is included in the price of the bonds. If you are the buyer, you do not report as income the interest that accrued before your date of purchase. The seller reports the accrued interest. Reduce the basis of the bond by the accrued interest reported by the seller. The following Examples illustrate these rules.

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Filing Tip

Accrued Interest

When you buy bonds between interest payment dates and pay accrued interest to the seller, this interest is taxable to the seller. The accrued interest is included on the Form 1099-INT you receive, but you should subtract it from your taxable interest; see Example 1 in 4.15.

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EXAMPLES

1. Purchase. On April 30, you buy for $5,200 a $5,000 corporate bond bearing interest at 5% per year, payable January 1 and July 1. The purchase price of the bond included accrued interest of $88.33 for the period January 1–April 30.

Interest received on 7/1	$125.00
Less: Accrued interest	83.33
Taxable interest	$ 41.67

Form 1099 sent to you includes the $83.33 of accrued interest. On Schedule B of Form 1040, you report the total interest of $125 received on July 1 and then on a separate line subtract the accrued interest of $83.33. Write “Accrued Interest” on the line where you show the subtraction. ...