Original issue discount and interest income on Form 1099-OID

What is Form 1099-OID?

Form 1099-OID is issued to taxpayers who have received an original issue discount (OID) on obligation investments of $10 or more during the tax year. Obligations include bonds, debentures, notes, and some certificates of deposit, with a term of over one year. Other financial instruments, such as Treasury securities, may also create OID income.

OID is created when the obligation's stated redemption price exceeds the issue price at maturity. This price difference is treated as a form of taxable interest income, so it is generally reported on Schedule B or as a write-in on Line 2 of Form 1040.

 You may need to file additional tax forms, depending on:

• The exact type of financial instrument that is generating income reported on Form 1099-OID
• Whether you sold or redeemed the obligation
• Whether you know the basis and/or reported it to the IRS

Amounts reported on Form 1099-OID vs. amounts reported on tax return

There are situations where the amount reported on Form 1099-OID is not actually what you report on your tax return. In Box 1, the payer reports the OID attributed to the tax year in question. That amount may not be the amount that you need to report on your tax return, depending on:

• The type of financial instrument
• Acquisition or issue date
• Whether an acquisition or bond premium was paid, which may reduce the taxable amount of the OID
• Whether the obligation is a stripped bond or coupon

Box 2 reports stated interest, which is completely separate from the OID. Report the stated interest income directly on Form 1040 or on Schedule B. The amount you should report varies based on whether you acquired or disposed of the asset in the same tax year. If you held the asset the entire year, you should report the entire amount as interest income. If not, you may need to report only part of the interest in the current tax year.

If there is an amount reported in Box 8 along with Box 2, the interest is Treasury interest, which you must report on your federal tax return, but it is not taxed at state and local levels. If there is an amount reported in Box 11, it is tax-exempt interest. You would report that amount on Line 2b of Form 1040, tax-exempt interest. .

Understanding the remaining boxes on Form 1099-OID

• Box 3: If you were charged penalties (or forfeited interest or principal) because you withdrew the obligation before it matured, this amount will be reported in Box 3. You can deduct this amount as an adjustment to income on Schedule 1 of Form 1040.
• Box 4: This is where backup withholding is reported. Generally, only taxpayers subject to backup withholding will have federal income tax withheld from the OID and stated interest payments, because they didn’t provide a Tax Identification Number to the payer.
• Box 5: There may be an amount reported in Box 5 if you purchased the security with an OID and the basis is known and reported to the IRS, referred to as “covered.” If you elected to include the market discount in your income, the amount will be reported in Box 5. In most cases, market discounts are reported as interest income, even if they are for a tax-exempt security.
• Box 6: The acquisition premium reported in Box 6 may reduce the amount of the OID reported as interest income on your tax return when it is a taxable covered security. If there are amounts reported in Boxes 6 and 11 for a tax-exempt security, it may reduce the amount of tax-exempt OID for the year.
• Box 8: Indicates whether the OID was for a Treasury obligation, which is taxable at the federal level, but exempt from state and local income taxes. If the number reported in Box 8 is negative, it represents an adjustment for deflation.
• Box 9: Your share of investment expenses from the asset are reported in Box 9 You may be able to deduct this amount on Schedule A, and it is included in Box 2.
• Box 10: You may need to report the bond premium in Box 10 on Schedule B as interest income, depending on whether you elected to amortize the premium with the issuer. If the security is covered, and an amount is reported in Box 2, it may reduce the amount reported as interest.
• Box 11: OID for tax-exempt obligations, such as municipal bonds, is reported in Box 11. This tax-exempt portion should be reported as information on the federal return. While municipal bond interest isn’t taxable on the federal return, it may be taxable on the state tax return.

Confused? We can help. A Jackson Hewitt Tax Pro can explain this form and help you fill it out, with any supporting documentation or calculations you may need. Taxes can be complicated, but you are not on your own. Contact us today.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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