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When you own investments that pay interest, the company that holds your financial accounts reports earnings of $10 or more to you and to the IRS on Form 1099-INT. To the IRS, accrued interest is the earnings a bond pays to the seller, but which is reported to the buyer in boxes 1 and 8 of the 1099-INT. This event occurs when you buy the bond between interest payment dates. You are not taxed on accrued interest, but you must disclose it on IRS Form 1040, Schedule B.
Write the name of all bond sellers reporting interest to you in Part I, line 1, of Schedule B. Next to each name, in the column titled “Amount,” include the amount reported on Form 1099-INT. Below the last name, write “nominee distribution” and indicate how much of the interest you just reported on line 1 is accrued interest. Write “accrued interest” next to the figure.
Add all amounts in line 1 of Schedule B, excluding the nominee distribution. Deduct from this total the nominee distribution you indicated in step 1. Write the result on line 2. If line 3 applies to you, add the appropriate number to it.
Subtract line 3 from line 2 of Schedule B. Write the result on line 4. Continue on to Part III if the amount of line 4 is more than $1,500.
Include the amount on Schedule B, line 4, on line 8a of IRS Form 1040 or 1040A. This is the portion of the interest reported to you that is taxable.
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