Click here to return to Bill Wood's Blog Pages. Yield Is Not Used In Computing Reported IncomeBox 1. Original Issue Discount for 2009 Shows the OID on the obligation for the part of the year you owned it. Report the amount in box 1 as interest income on your income tax return. However, depending on the type of debt instrument, the issue or acquisition date, and other factors (for example, if you paid acquisition or bond premium, or the obligation is a stripped bond or coupon), you may have to figure the correct amount of OID to report on your return. See Pub. 1212, Guide to Original Issue Discount (OID) Instruments, for details on how to figure the correct OID. The calculations themselves are nothing short of byzantine. Pages 12 and 13 of IRS Publication 1212 lay out the complicated mathematical steps that the taxpayer must take to reach the correct caculation of OID income for income tax reporting purposes. After extensive research and after conferring with the IRS helpline, I finally came to understand that IRS Publication 550 (in the middle column on page 15) makes it clear that the amounts which brokerage firms are required to report to individual taxpayers may not be the correct numbers for tax reporting purposes and that, as a result, first, the individual taxpayer must determine which reported OID income amounts are in fact valid for tax reporting purposes and, second, the taxpayer must recalculate those other amounts, such as the reported accretion on Treasury strips, which are not valid for tax reporting. Here's the relevant language for Treasury strips: You must refigure the OID shown on the Form 1099-OID you receive for a stripped bond or coupon. For information about figuring the correct amount of OID on these instruments to include in your income, see Figuring OID on Stripped Bonds and Coupons in Publication 1212. However, owners of stripped bonds and coupons should not rely on the OID shown in Section II of The OID tables [which are used by brokerage firms to generate 1099-OID reporting] because the amounts listed in Section II for stripped bonds or coupons are figured without reference to the date or price at which you acquired them. I discovered this requirement early in 2010 when I received a form 1099-OID for 2009 which showed an approximate 65% reduction in the OID income from Treasury strips that had been reported in other recent years despite there being no material changes in my portfolio of these OID securities. Since I was already quite familiar with the way value is accreted on zero coupon securities such as Treasury strips, I knew immediately that something was seriously amiss. It was only in attempting to understand why the reported OID income had fallen off so sharply that I discovered Publication 550 and the recomputation requirements spelled out in Publication 1212. While I continue to have no good idea why the IRS requires that brokerage firms report OID income on Treasury strips (and certain other original issue discount securities) "without reference to the date or price at which you acquired them", it appears that for some reason the amounts of OID income reported via Form 1099-OID for 2009 (see: page 86, Section II of The OID tables) are substantially lower than for any recent year. This means, in short, that any investor who held Treasury strips (and probably certain other original issue discount securities) during the 2009 tax year who simply reported the OID income provided by his broker on the form 1099-OID as taxable income probably under-reported his true taxable OID income by somewhere between 50% and 75%! In short, assuming the IRS doesn't decide to go after you, you have just realized-- however unintentionally-- one heck of a savings in your income tax liability for the 2009 tax year. In my attempts to make sense of the lower than expected OID reporting described in the preceding paragraph, I spoke with various accountants, tax attorneys, representives of my brokerage firm and lower level IRS employees. Not one of these professionals realized or understood what more senior IRS officials later confirmed to me was a fact: Specifically, (1) that taxpayers should not necessarily rely on the income reported to them on their form 1099-OID and (2) that taxpayers are themselves responsible for making the very complex computations of OID income on Treasury strips (and certain other original issue discount securities) which they hold using the aforementioned formulas provided in IRS Publication 1212. |
