1099 changes affecting OID generally means good news for investors
By Stevie Conlon (pictured), Senior Director & Tax Counsel, Wolters Kluwer Financial Services – Final regulations issued in April 2013 (T.D. 9616) provide rules for reporting of basis on debt instruments and for adjustments to basis by brokers for OID (original issue discount), bond premium, market discount, and acquisition premium.
Accompanying temporary regulations further increase the complexity of Form 1099-INT and 1099-OID reporting for debt instruments acquired on or after January 1, 2014. Investors will see amounts newly required under the temporary regulations on 2014 Forms 1099-INT and 1099-OID mailed in early 2015.
While the new boxes may be confusing at first because of the additional information provided, it will be of great benefit to investors. The IRS has required these calculations for many years. Many investors may have been unable to perform them, however, due to the challenging mathematical equations or may not have realized they were required to do so. Adding to the confusion, brokers will be required to populate these boxes for debt on a staggered schedule: (1) for debt instruments with less complex features, covered if acquired after 2013, and (2) for more complex debt instruments or fixed-yield, fixed-maturity debt instruments covered if acquired after 2015. So this new information may not be provided and the boxes may be left blank in the case of debt instruments held by investors that were acquired before these dates.
Changes to Form 1099-OID
The Form 1099-OID for the 2014 tax year (that will generally be filed and delivered to taxpayers in early 2015) contains brand-new boxes for market discount currently included in taxable income and acquisition premium adjustments to reported OID. New boxes for market discount and acquisition premium provide new and more detailed information that will benefit the taxpayer in tax preparation, but which will create substantial new reporting burdens for brokers. For covered debt instruments, market discount of USD10 or more is reported in Box 5 if the bondholder has made the election to accrue market discount currently (previously such market discount is reported on Form 1099-MISC). Under the cost basis reporting regulations, market discount is one of the customer tax elections required to be taken into account by brokers. This elections applies to all debt instruments acquired by the taxpayer during the taxable year in which the election is made, and thereafter until revoked. In the absence of notification, the broker must assume that the taxpayer has not made the election.
Customers may not be familiar with the various elections they are entitled to make that affect calculations made by brokers on these forms and reported to the IRS. This could also create confusion for investors.
Changes to Form 1099-INT
There are also important changes to note on the 2014 Form 1099-INT. Under the finalized instructions dated 3 January, 2014 for this form and the 1099-OID, brokers must report the amount of bond premium amortization for the tax year for a covered security acquired with bond premium. However, in the case of a taxable bond, if you have notified your broker that you elect not to amortize bond premium, the broker will not report any amount of bond premium amortization.
Otherwise, brokers will report either (a) a net amount of interest that reflects the offset of interest by the amount of bond premium amortization for the year or (b) a gross amount for both the interest and the bond premium amortization for the year. The instructions give an example: If a taxpayer receives USD20 of taxable interest from a corporate bond and the amount of bond premium amortization for the year is USD2, you may report $18 of interest income in box 1 and $0 in box 11, or you may report USD20 of interest income in box 1 and USD2 in box 11. For a non-covered security acquired with bond premium, you are only required to report the gross amount of interest.
Brokers and their tax reporting teams will be forced to scramble to address these new Form 1099-OID and Form 1099-INT reporting requirements (as well as not yet released changes to Form 1099-B). It will be a significant burden and challenge for them because of the paradigm shift from calculations based on debt issue generic information to unique tax lot calculations for bond premium, market discount and acquisition premium that will be subject to reporting beginning in the first quarter of 2015.
These changes will likely be confusing to investors at first as they review the revised and updated Forms 1099-INT and 1099-OID that they will receive beginning in the first quarter of 2015. The fact that the boxes may be left blank for previously acquired or excluded debt may also be confusing. However, investors will generally benefit from these changes because brokers will essentially be performing the complex calculations required of taxpayers, thereby making tax reporting easier for customers.
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