Market Discount Bonds
A market discount bond is any bond having market discount except:
- Short-term obligations (those with fixed maturity dates of up to 1 year from the date of
issue),
- Tax-exempt obligations that you bought before May 1, 1993,
- U.S. savings bonds, and
- Certain installment obligations.
Market discount arises when the value of a debt obligation decreases after its issue
date, generally because of an increase in interest rates. If you buy a bond on the
secondary market, it may have market discount.
When you buy a market discount bond, you can choose to accrue the market discount over
the period you own the bond and include it in your income currently as interest income. If
you do not make this choice, the following rules generally apply.
- You must treat any gain when you dispose of the bond as ordinary interest income, up to
the amount of the accrued market discount. See Discounted Debt Instruments under Capital
Gains and Losses in chapter 4.
- You must treat any partial payment of principal on the bond as ordinary interest income,
up to the amount of the accrued market discount. See Partial principal payments, later
in this discussion.
- If you borrow money to buy or carry the bond, your deduction for interest paid on the
debt is limited. See Deferral of interest deduction for market discount bonds under
When To Deduct Investment Interest in chapter 3.
Market discount. Market discount is the amount of the stated
redemption price of a bond at maturity that is more than your basis in the bond
immediately after you acquire it. You treat market discount as zero if it is less than
one-fourth of 1% (.0025) of the stated redemption price of the bond multiplied by the
number of full years to maturity (after you acquire the bond).
If a market discount bond also has OID, the market discount is the sum of the bond's
issue price and the total OID includible in the gross income of all holders (for a
tax-exempt bond, the total OID that accrued) before you acquired the bond, reduced by your
basis in the bond immediately after you acquired it.
Bonds acquired at original issue. Generally, a bond that you
acquired at original issue is not a market discount bond. If your adjusted basis in a bond
is determined by reference to the adjusted basis of another person who acquired the bond
at original issue, you are also considered to have acquired it at original issue.
Exceptions. A bond you acquired at original issue can be a
market discount bond if either of the following is true.
- Your cost basis in the bond is less than the bond's issue price.
- The bond is issued in exchange for a market discount bond under a plan of
reorganization. (This does not apply if the bond is issued in exchange for a market
discount bond issued before July 19, 1984, and the terms and interest rates of both bonds
are the same.)
Accrued market discount. The accrued market discount is figured in
one of two ways.
Ratable accrual method. Treat the market discount as
accruing in equal daily installments during the period you hold the bond. Figure the daily
installments by dividing the market discount by the number of days after the date you
acquired the bond, up to and including its maturity date. Multiply the daily installments
by the number of days you held the bond to figure your accrued market discount.
Constant yield method. Instead of using the ratable accrual
method, you can choose to figure the accrued discount using a constant interest rate (the
constant yield method). Make this choice by attaching to your timely filed return a
statement identifying the bond and stating that you are making a constant interest rate
election. The choice takes effect on the date you acquired the bond. If you choose to use
this method for any bond, you cannot change your choice for that bond.
For information about using the constant yield method, see Figuring OID using the
constant yield method under Debt Instruments Issued After 1984 in
Publication 1212. To use this method to figure market discount (instead of OID), treat the
bond as having been issued on the date you acquired it. Treat the amount of your basis
(immediately after you acquired the bond) as the issue price. Then apply the formula shown
in Publication 1212.
Choosing to include market discount in income currently. You can
make this choice if you have not revoked a prior choice to include market discount in
income currently within the last 5 calendar years. Make the choice by attaching to your
timely filed return a statement in which you:
- State that you have included market discount in your gross income for the year under
section 1278(b) of the Internal Revenue Code, and
- Describe the method you used to figure the accrued market discount for the year.
Once you make this choice, it will apply to all market discount bonds that you acquire
during the tax year and in later tax years. You cannot revoke your choice without the
consent of the IRS.
Also see Election To Report All Interest as OID, later. If you make that
election, you must use the constant yield method.
Effect on basis. You increase the basis of your bonds by
the amount of market discount you include in your income.
Partial principal payments. If you receive a partial payment of
principal on a market discount bond that you acquired after October 22, 1986, and you did
not choose to include the discount in income currently, you must treat the payment as
ordinary interest income up to the amount of the bond's accrued market discount. Reduce
the amount of accrued market discount reportable as interest at disposition by that
amount.
You can choose to figure accrued market discount for this purpose:
- On the basis of the constant yield method, described earlier,
- In proportion to the accrual of OID for any accrual period, if the debt instrument has
OID, or
- In proportion to the amount of stated interest paid in the accrual period, if the debt
instrument has no OID.
Under method (2) above, figure accrued market discount for a period by multiplying the
total remaining market discount by a fraction. The numerator (top part) of the fraction is
the OID for the period, and the denominator (bottom part) is the total remaining OID at
the beginning of the period.
Under method (3) above, figure accrued market discount for a period by multiplying the
total remaining market discount by a fraction. The numerator is the stated interest paid
in the accrual period, and the denominator is the total stated interest remaining to be
paid at the beginning of the accrual period.
Discount on
Short-Term Obligations
When you buy a short-term obligation (one with a fixed maturity date
of 1 year or less from the date of issue), other than a tax-exempt obligation, you
can generally choose to include any discount and interest payable on the obligation in
income currently. If you do not make this choice, the following rules
generally apply.
- You must treat any gain when you sell, exchange, or redeem the obligation as ordinary
income, up to the amount of the ratable share of the discount. See Discounted Debt
Instruments under Capital Gains and Losses in chapter 4.
- If you borrow money to buy or carry the obligation, your deduction for interest paid on
the debt is limited. See Deferral of interest deduction for short-term obligations under
When To Deduct Investment Interest in chapter 3.
Short-term obligations for which no choice is available. You must
include any discount or interest in current income as it accrues for any short-term
obligation (other than a tax-exempt obligation) that is:
- Held by an accrual-basis taxpayer,
- Held primarily for sale to customers in the ordinary course of your trade or business,
- Held by a bank, regulated investment company, or common trust fund,
- Held by certain pass-through entities,
- Identified as part of a hedging transaction, or
- A stripped bond or stripped coupon held by the person who stripped the bond or coupon
(or by any other person whose basis in the obligation is determined by reference to the
basis in the hands of that person).
Effect on basis. Increase the basis of your obligation by the amount
of discount you include in income currently.
Figuring the accrued discount. Figure the accrued discount by using
either the ratable accrual method or the constant yield method discussed
previously in Accrued market discount under Market Discount Bonds, earlier.
Government obligations. For an obligation described above that is a
short-term government obligation, the amount you include in your income for the current
year is the accrued acquisition discount, if any, plus any other accrued interest payable
on the obligation. The acquisition discount is the stated redemption price
at maturity minus your basis.
If you choose to use the constant yield method to figure accrued
acquisition discount, treat the cost of acquiring the obligation as the issue
price. If you choose to use this method, you cannot change your choice.
Nongovernment obligations. For an obligation listed above that is
not a government obligation, the amount you include in your income for the current year is
the accrued OID, if any, plus any other accrued interest payable. If you choose the
constant yield method to figure accrued OID, apply it by using the obligation's issue
price.
Choosing to include accrued acquisition discount instead of OID.
You can choose to report accrued acquisition discount (defined earlier under Government
obligations) rather than accrued OID on these short-term obligations. Your choice
will apply to the year for which it is made and to all later years and cannot be changed
without the consent of the IRS.
You must make your choice by the due date of your return, including extensions, for the
first year for which you are making the choice. Attach a statement to your return or
amended return indicating:
- Your name, address, and social security number,
- The choice you are making and that it is being made under section 1283(c)(2) of the
Internal Revenue Code,
- The period for which the choice is being made and the obligation to which it applies,
and
- Any other information necessary to show you are entitled to make this choice.
Choosing to include accrued discount and other interest in current income.
If you acquire short-term discount obligations that are not subject to the rules for
current inclusion in income of the accrued discount or other interest, you can choose to
have those rules apply. This choice applies to all short-term obligations you acquire
during the year and in all later years. You cannot change this choice without the consent
of the IRS.
The procedures to use in making this choice are the same as those described for
choosing to include acquisition discount instead of OID on nongovernment obligations in
current income. However, you should indicate that you are making the choice under section
1282(b)(2) of the Internal Revenue Code.
Also see the following discussion. If you make the election to report all interest
currently as OID, you must use the constant yield method.
Election To Report
All Interest as OID
Generally, you can elect to treat all interest on a debt instrument acquired during the
tax year as OID and include it in income currently. For purposes of this election,
interest includes stated interest, acquisition discount, OID, de minimis OID, market
discount, de minimis market discount, and unstated interest as adjusted by any amortizable
bond premium or acquisition premium. See Treasury Regulation 1.1272-3.
When To Report
Interest Income
- Accrual method
- Cash method
When to report your interest income depends on whether you use the cash method or an
accrual method to report income.
Cash method. Most individual
taxpayers use the cash method. If you use this method, you generally report your
interest income in the year in which you actually or constructively receive it. However,
there are special rules for reporting the discount on certain debt instruments. See U.S.
Savings Bonds and Discount on Debt Instruments, earlier.
Example. On September 1, 2000, you loaned another individual
$2,000 at 12% compounded annually. You are not in the business of lending money. The note
stated that principal and interest would be due on August 31, 2002. In 2002, you received
$2,508.80 ($2,000 principal and $508.80 interest). If you use the cash method, you must
include in income on your 2002 return the $508.80 interest you received in that year.
Constructive receipt. You
constructively receive income when it is credited to your account or made available to
you. You do not need to have physical possession of it. For example, you are
considered to receive interest, dividends, or other earnings on any deposit or account in
a bank, savings and loan, or similar financial institution, or interest on life insurance
policy dividends left to accumulate, when they are credited to your account and subject to
your withdrawal. This is true even if they are not yet entered in your passbook.
You constructively receive income on the deposit or account even if you must:
- Make withdrawals in multiples of even amounts,
- Give a notice to withdraw before making the withdrawal,
- Withdraw all or part of the account to withdraw the earnings, or
- Pay a penalty on early withdrawals, unless the interest you are to receive on an early
withdrawal or redemption is substantially less than the interest payable at maturity.
Accrual method. If you use an
accrual method, you report your interest income when you earn it, whether or not you have
received it. Interest is earned over the term of the debt instrument.
Example. If, in the previous example, you use an accrual method,
you must include the interest in your income as you earn it. You would report the interest
as follows: 2000, $80; 2001, $249.60; and 2002, $179.20.
Coupon bonds. Interest on coupon
bonds is taxable in the year the coupon becomes due and payable. It does not matter
when you mail the coupon for payment.
How To Report
Interest Income
- Nominee
- Original issue discount (OID)
Generally, you report all of your taxable interest income on line 8a, Form 1040; line
8a, Form 1040A; or line 2, Form 1040EZ.
You cannot use Form 1040EZ if your interest income is more than $1,500. Instead, you
must use Form 1040A or Form 1040.
In addition, you cannot use Form 1040EZ if you must use Form 1040, as described later,
or if any of the statements listed under Schedule B, later, are true.
Form 1040A. You must complete Part I of Schedule 1 (Form 1040A) if
you file Form 1040A and any of the following are true.
- Your taxable interest income is more than $1,500.
- You are claiming the interest exclusion under the Education Savings Bond Program
(discussed earlier).
- You received interest from a seller-financed mortgage, and the buyer used the property
as a home.
- You received a Form 1099-INT for tax-exempt interest.
- You received a Form 1099-INT for U.S. savings bond interest that includes amounts you
reported before 2002.
- You received, as a nominee, interest that actually belongs to someone else.
- You received a Form 1099-INT for interest on frozen deposits.
List each payer's name and the amount of interest income received from each payer on
line 1. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the
brokerage firm as the payer.
You cannot use Form 1040A if you must use Form 1040, as described next.
Form 1040. You must use Form 1040 instead of Form 1040A or Form
1040EZ if:
- You forfeited interest income because of the early withdrawal of a time deposit,
- You received or paid accrued interest on securities transferred between interest payment
dates,
- You had a financial account in a foreign country, unless the combined value of all
foreign accounts was $10,000 or less during all of 2002 or the accounts were with certain
U.S. military banking facilities,
- You acquired taxable bonds after 1987 and choose to reduce interest income from the
bonds by any amortizable bond premium (discussed in chapter 3 under Bond Premium
Amortization), or
- You are reporting OID in an amount more or less than the amount shown on Form 1099-OID.
Schedule B. You must complete Part I of Schedule B (Form
1040) if you file Form 1040 and any of the following apply.
- Your taxable interest income is more than $1,500.
- You are claiming the interest exclusion under the Education Savings Bond Program
(discussed earlier).
- You had a foreign account.
- You received interest from a seller-financed mortgage, and the buyer used the property
as a home.
- You received a Form 1099-INT for tax-exempt interest.
- You received a Form 1099-INT for U.S. savings bond interest that includes amounts you
reported before 2002.
- You received, as a nominee, interest that actually belongs to someone else.
- You received a Form 1099-INT for interest on frozen deposits.
- You received a Form 1099-INT for interest on a bond that you bought between interest
payment dates.
- Statement (4) or (5) in the preceding list is true.
On line 1, Part I, list each payer's name and the amount received from each. If you
received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm
as the payer.
Reporting tax-exempt interest. Report
the total of your tax-exempt interest (such as interest or accrued OID on certain state
and municipal bonds) and exempt-interest dividends from a mutual fund on line 8b of
Form 1040A or Form 1040. If you file Form 1040EZ, print TEI in the space to the
right of the words Form 1040EZ on line 2. After TEI, show the amount of
your tax-exempt interest, but do not add tax-exempt interest in the total on Form 1040EZ,
line 2.
You should not have received a Form 1099-INT for tax-exempt interest. But if you did,
you must fill in Schedule 1 (Form 1040A) or Schedule B (Form 1040). See the Schedule 1 or
Schedule B instructions for how to report this. Be sure to also show this tax-exempt
interest on line 8b.
Do not report
interest from an individual retirement arrangement (IRA) as tax-exempt interest.
Form 1099-INT. Your taxable
interest income, except for interest from U.S. savings bonds and Treasury
obligations, is shown in box 1 of Form 1099-INT. Add this amount to any other taxable
interest income you received. You must report all of your taxable interest income even if
you do not receive a Form 1099-INT.
![1099 INT](../images2/15093r09.gif)
1099 INT
If you forfeited interest income because of the early withdrawal of a time deposit, the
deductible amount will be shown on Form 1099-INT, in box 2. See Penalty on early
withdrawal of savings, later.
Box 3 of Form 1099-INT shows the amount of interest income you received from U.S.
savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Add the amount shown in
box 3 to any other taxable interest income you received, unless part of the amount in box
3 was previously included in your interest income. If part of the amount shown in box 3
was previously included in your interest income, see U.S. savings bond interest
previously reported, later. If you redeemed U.S. savings bonds you bought after 1989
and you paid qualified educational expenses, see Interest excluded under the Education
Savings Bond Program, later.
Box 4 (federal income tax withheld) of Form 1099-INT will contain an amount if you were
subject to backup withholding. Report the amount from box 4 on Form 1040EZ, line 7, on
Form 1040A, line 39, or on Form 1040, line 62.
Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an
itemized deduction. Chapter 3 discusses investment expenses.
If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. You
may be able to take a credit for the amount shown in box 6 (foreign tax paid) unless you
deduct this amount on Schedule A of Form 1040 as Other taxes. To take the credit,
you may have to file Form 1116, Foreign Tax
Credit. For more information, see Publication 514, Foreign Tax Credit for
Individuals.
Form 1099-OID. The taxable OID
on a discounted obligation for the part of the year you owned it is shown in box 1 of Form
1099-OID. Include this amount in your total taxable interest income. But see Refiguring
OID shown on Form 1099-OID under Original Issue Discount (OID), earlier.
You must report all taxable OID even if you do not receive a Form 1099-OID.
Box 2 of Form 1099-OID shows any taxable interest on the obligation other than OID. Add
this amount to the OID shown in box 1 and include the result in your total taxable income.
If you forfeited interest or principal on the obligation because of an early
withdrawal, the deductible amount will be shown in box 3. See Penalty on early
withdrawal of savings, later.
Box 4 of Form 1099-OID will contain an amount if you were subject to backup
withholding. Report the amount from box 4 on Form 1040EZ, line 7, on Form 1040A, line 39,
or on Form 1040, line 62.
Box 7 of Form 1099-OID shows investment expenses you may be able to deduct as an
itemized deduction. Chapter 3 discusses investment expenses.
U.S. savings bond interest previously reported. If you received a Form 1099-INT for U.S. savings bond interest, the form
may show interest you do not have to report. See Form 1099-INT for U.S. savings bond
interest under U.S. Savings Bonds, earlier.
On line 1, Part I of Schedule B (Form 1040), or on line 1, Part I of Schedule 1 (Form
1040A), report all the interest shown on your Form 1099-INT. Then follow these steps.
- Several lines above line 2, enter a subtotal of all interest listed on line 1.
- Below the subtotal write U.S. Savings Bond Interest Previously Reported and
enter amounts previously reported or interest accrued before you received the bond.
- Subtract these amounts from the subtotal and enter the result on line 2.
Example 1. Your parents bought U.S. savings bonds for you when
you were a child. The bonds were issued in your name, and the interest on the bonds was
reported each year as it accrued. (See Choice to report interest each year under U.S.
Savings Bonds, earlier.)
In March 2002, you redeemed one of the bonds - a $1,000 series EE bond. The bond was
originally issued in March 1984. When you redeemed the bond, you received $1,522.00 for
it.
The Form 1099-INT you received shows interest income of $1,022.00. However, since the
interest on your savings bonds was reported yearly, you need only include the $31.20
interest that accrued from January 2002 to March 2002.
You received no other taxable interest for 2002. You file Form 1040A.
On line 1, Part I of Schedule 1 (Form 1040A), enter your interest income as shown on
Form 1099-INT - $1,022.00. (If you had other taxable interest income, you would enter it
next and then enter a subtotal, as described earlier, before going to the next step.)
Several lines above line 2, write U.S. Savings Bond Interest Previously Reported
and enter $990.80 ($1,022.00 - $31.20). Subtract $990.80 from $1,022.00 and write $31.20
on line 2. Enter $31.20 on line 4 of Schedule 1 and on line 8a of Form 1040A.
Example 2. Your uncle died and left you a $1,000 series EE bond.
You redeem the bond when it reaches maturity.
Your uncle paid $500 for the bond, so $500 of the amount you receive upon redemption is
interest income. Your uncle's executor included in your uncle's final return $200 of the
interest that had accrued at the time of your uncle's death. You have to include only $300
in your income.
The bank where you redeem the bond gives you a Form 1099-INT showing interest income of
$500. You also receive a Form 1099-INT showing taxable interest income of $300 from your
savings account.
You file Form 1040 and you complete Schedule B. On line 1 of Schedule B, you list the
$500 and $300 interest amounts shown on your Forms 1099. Several lines above line 2, you
put a subtotal of $800. Below this subtotal, write U.S. Savings Bond Interest
Previously Reported and enter the $200 interest included in your uncle's final
return. Subtract the $200 from the subtotal and write $600 on line 2. You then complete
the rest of the form.
Worksheet for savings bonds distributed from a retirement or profit-sharing
plan. If you cashed a savings bond acquired in a taxable distribution
from a retirement or profit-sharing plan (as discussed under U.S. Savings Bonds,
earlier), your interest income does not include the interest accrued before the
distribution and taxed as a distribution from the plan.
Use the
worksheet below to figure the amount you subtract from the interest shown on Form
1099-INT.
A. |
Write the amount of cash received upon redemption of the bond |
|
B. |
Write the value of the bond at the time of distribution by the plan |
|
C. |
Subtract the amount on line B from the amount on line A. This is the amount of
interest accrued on the bond since it was distributed by the plan |
|
D. |
Write the amount of interest shown on your Form 1099-INT |
|
E. |
Subtract the amount on line C from the amount on line D. This is the amount you
include in U.S. Savings Bond Interest Previously Reported |
|
Your employer should tell you the value of each bond on the date it was distributed.
Example. You received a distribution of series EE U.S. savings
bonds in December 2000 from your company's profit-sharing plan.
In March 2002, you redeemed a $100 series EE bond that was part of the distribution you
received in 2000. You received $98.68 for the bond the company bought in May 1990. The
value of the bond at the time of distribution in 2000 was $93.04. (This is the amount you
included on your 2000 return.) The bank gave you a Form 1099-INT that shows $48.68
interest (the total interest from the date the bond was purchased to the date of
redemption). Since a part of the interest was included in your income in 2000, you need to
include in your 2002 income only the interest that accrued after the bond was distributed
to you.
On line 1 of Schedule B (Form 1040), include all the interest shown on your Form
1099-INT as well as any other taxable interest income you received. Several lines above
line 2, put a subtotal of all interest listed on line 1. Below this subtotal write U.S.
Savings Bond Interest Previously Reported and enter the amount figured on the
worksheet below.
A. |
Write the amount of cash received upon redemption of the bond |
$98.68 |
B. |
Write the value of the bond at the time of distribution by the plan |
93.04 |
C. |
Subtract the amount on line B from the amount on line A. This is the amount of
interest accrued on the bond since it was distributed by the plan |
$5.64 |
D. |
Write the amount of interest shown on your Form 1099-INT |
$48.68 |
E. |
Subtract the amount on line C from the amount on line D. This is the amount you
include in U.S. Savings Bond Interest Previously Reported |
$43.04 |
Interest excluded under the Education Savings Bond Program. Use Form 8815, to figure your interest exclusion
when you redeem qualified savings bonds and pay qualified higher educational expenses
during the same year.
For more information on the exclusion and qualified higher educational expenses, see
the earlier discussion under Education Savings Bond Program.
You must show your total interest from qualified savings bonds that you cashed during
2002 on line 6 of Form 8815 and on line 1 of either Schedule 1 (Form 1040A) or Schedule B
(Form 1040). After completing Form 8815, enter the result from line 14 (Form 8815) on line
3 of Schedule 1 (Form 1040A) or line 3 of Schedule B (Form 1040).
Interest on seller-financed mortgage. If an individual buys his or her home from you in a sale that you finance, you
must report the buyer's name, address, and social security number on line 1 of
Schedule 1 (Form 1040A) or line 1 of Schedule B (Form 1040). If you do not, you may have
to pay a $50 penalty. The buyer may have to pay a $50 penalty if he or she does not give
you this information.
You must also give your name, address, and social security number (or employer
identification number) to the buyer. If you do not, you may have to pay a $50 penalty.
Frozen deposits. Even if you
receive a Form 1099-INT for interest on deposits that you could not withdraw at the end of
2002, you must exclude these amounts from your gross income. (See Interest
income on frozen deposits under Interest Income, earlier.) Do not include
this income on line 8a of Form 1040A or Form 1040. In Part I of Schedule 1 (Form 1040A) or
Part I of Schedule B (Form 1040), include the full amount of interest shown on your Form
1099-INT on line 1. Several lines above line 2, put a subtotal of all interest income.
Below this subtotal, write Frozen Deposits and show the amount of interest that
you are excluding. Subtract this amount from the subtotal and write the result on line 2.
Accrued interest on bonds. If
you received a Form 1099-INT that reflects accrued interest paid on a bond you bought
between interest payment dates, include the full amount shown as interest on the
Form 1099-INT on line 1, Part I of Schedule B (Form 1040). Then, below a subtotal of all
interest income listed, write Accrued Interest and the amount of accrued interest
that you paid to the seller. That amount is taxable to the seller, not you. Subtract that
amount from the interest income subtotal. Enter the result on line 2 and also on Form
1040, line 8a.
For more information, see Bonds Sold Between Interest Dates, earlier.
Nominee distributions. If you
received a Form 1099-INT that includes an amount you received as a nominee for the real
owner, report the full amount shown as interest on the Form 1099-INT on line 1,
Part I of Schedule 1 (Form 1040A) or Schedule B (Form 1040). Then, below a subtotal of all
interest income listed, write Nominee Distribution and the amount that actually
belongs to someone else. Subtract that amount from the interest income subtotal. Enter the
result on line 2 and also on line 8a of Form 1040A or 1040.
File Form 1099-INT with the IRS. If you received interest as a nominee in 2002, you must file a Form 1099-INT
for that interest with the IRS. Send Copy A of Form 1099-INT with a Form 1096, Annual
Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service
Center by February 28, 2003 (March 31, 2003 if you file Form 1099-INT electronically).
Give the actual owner of the interest Copy B of the Form 1099-INT by January 31, 2003. On
Form 1099-INT, you should be listed as the Payer. Prepare one Form 1099-INT for
each other owner and show that person as the Recipient. However, you do not have
to file Form 1099-INT to show payments for your spouse. For more information about the
reporting requirements and the penalties for failure to file (or furnish) certain
information returns, see the General Instructions for Forms 1099, 1098, 5498, and
W2-G.
Similar rules apply to OID reported to you as a nominee on Form 1099-OID. You must file
a Form 1099-OID with Form 1096 to show the proper distributions of the OID.
Example. You and your sister have a joint savings account that
paid $1,500 interest for 2002. Your sister deposited 30% of the funds in this account, and
you and she have agreed to share the yearly interest income in proportion to the amount
that each of you has invested. Because your social security number was given to the bank,
you received a Form 1099-INT for 2002 that includes the interest income earned belonging
to your sister. This amount is $450, or 30% of the total interest of $1,500.
You must give your sister a Form 1099-INT by January 31, 2003, showing $450 of interest
income that she earned for 2002. You must also send a copy of the nominee Form 1099-INT,
along with Form 1096, to the Internal Revenue Service Center by February 28, 2003 (March
31, 2003, if you file Form 1099-INT electronically). Show your own name, address, and
social security number as that of the Payer on the Form 1099-INT. Show your
sister's name, address, and social security number in the blocks provided for
identification of the Recipient.
When you prepare your own federal income tax return, report the total amount of
interest income, $1,500, on line 1, Part I of Schedule 1 (Form 1040A) or line 1, Part I of
Schedule B (Form 1040), and identify the name of the bank that paid this interest. Show
the amount belonging to your sister, $450, as a subtraction from a subtotal of all
interest on Schedule 1 (or Schedule B) and identify this subtraction as a Nominee
Distribution. (Your sister will report the $450 of interest income on her own tax
return, if she has to file a return, and identify you as the payer of that amount.)
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