When you purchase a bond between its interest payment dates, you’re often required to pay the seller accrued interest for the period they held the bond. However, this accrued interest is not immediately deductible. Instead, you can deduct it only when that interest is considered received. This article walks through a step-by-step algorithm to determine when and how much of that paid interest you can deduct, and how to properly track it using tax forms like Form 1099-INT, Form 1099-B, and Schedule B.

✨ Quick Summary

  • Accrued interest paid on a bond is not deductible until it is received.
  • Interest may be received through:
    • An actual interest payment from the bond (reported on Form 1099-INT)
    • Accrued interest received as part of a bond sale (must be manually reported on Schedule B, not on 1099-INT)
  • You must track whether interest has been recovered and deduct accordingly.

✅ Step-by-Step Algorithm

  • For each CUSIP where you paid accrued interest when purchasing the bond:
    • Find the total accrued interst
    • Check if the CUSIP appears on Form 1099-INT.
      • If yes:
        • It means the bond paid actual interest during the year.
        • You can deduct the accrued interest paid on any lots of that CUSIP.
        • This deduction goes on Schedule B, and reduces the interest reported on 1099-INT.
        • Even if you have some shares of the CUSIP sold before the payment date, the interest will be reflected on the sale price that goes to Schedule B.
      • else:
        • There are two possibilities:
          • (a) The bond did not pay any interest during the year.
          • (b) The bond was sold before the interest payment date.
        • Check Form 1099-B:
          • If the CUSIP appears on 1099-B
            • Identify the number of units (face value) sold.
            • Prorate the original accrued interest paid by the fraction of the bond that was sold.
            • This prorated portion is considered recovered and is deductible.
            • You must manually report the accrued interest received as interest income on Schedule B, as it is not included in 1099-INT.
    • Any remaining unrecovered accrued interest for the CUSIP
    • Carry forward to the next year.
    • Reapply this algorithm recursively.

📊 Accrued Interest Deduction Example

CUSIP Accrued Paid 1099-INT? 1099-B? (Percent) Action
AAA123ABC $120.00 Yes Yes/No Deduct full $120
BBB456XYZ $90.00 No Yes (50%) Deduct $45 now; carry forward $45
CCC789DEF $80.00 No No Carry forward full $80

📃 Where to Report

Event Reflected on Line
Accrued interest received via coupon 1099-INT Schedule B
Accrued interest received via sale 1099-B Schedule B, D, Form 8949
Accrued interest paid (deducted) 1099-* supplemental info Schedule B as a negative adjustment

🔍 Important Notes

  • Do not rely solely on Form 1099-INT to determine how much interest you received. If you sold a bond before the coupon date, your broker will not report the accrued interest received on the sale in 1099-INT.
  • In that case, you must report it manually on Schedule B.
  • Once you report accrued interest as income, you may deduct an equal amount that you previously paid.
  • Always retain records of purchase confirmations and broker accrued interest summaries.

🚀 Conclusion

Tracking accrued interest paid and deducted requires coordinating between multiple forms and careful recordkeeping. Use this algorithm each year to ensure you’re deducting the correct amount only when earned, and avoid either missing deductions or double-deducting interest.