You pay for what you get. Yep, heard that one before. But have you ever heard the phrase “Report on what you don’t get”? Yeah, I haven’t either, but it applies to this topic, so now it’s a thing!
For you bond savvy folks out there, there is a change in place for tax year 2017 that you might want to know about, especially if you invest in securities that have Tax-Exempt Original Issue Discount (OID). Remember, non-taxable is the not the same as non-reportable.
So what exactly is OID? According to the IRS, OID is a form of interest. It is the excess of a debt instrument's stated redemption price at maturity over its issue price.
Since the inception of tax-exempt OID, guidance has been murky regarding how (or if) brokers should be reporting this income type and if so, where. At one point, it was being reported on the 1099-INT in the same box as tax-exempt interest. In 2007, information was given that further direction would be given at a later date. Isn’t that cyclical?
For the past 10 years, it has been at the discretion of firms to decide the best course of action. That is, until now. Brokers are now required to report tax-exempt OID for covered securities (purchased after 1/1/2017) on Form 1099-OID. A new box on the 1099 has been created for this income, box 11 and aptly titled Tax-Exempt OID.
There is still room for discretion though. If a firm chooses to report non-covered lots, they may. Tax-exempt OID for non-covered lots will not be reported on form 1099 for TD Ameritrade clients. It is always beneficial to have clear guidance from the IRS when it comes to tax reporting. Brokers want to comply just as much as individual tax filers.
So What Does This Mean for Me?
Since brokers used to be able to adjust whether or not tax exempt OID was reportable, you may not have seen this on your previous tax forms. To learn more, take advantage of the resources available to you at no cost. EMMA is a helpful site where you can peruse information, tax statements, and prospectus’ on municipal bonds. And if you need assistance in tax filing, you may visit irs.gov or contact your tax professional.
Still curious to learn more about OID? Review this article on Fixed Income Reporting: Understanding Adjustments to Your Cost Basis.
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