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Free State Tax

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Free State Tax

Free state tax 29. Free state tax   Limit on Itemized Deductions Table of Contents Introduction Useful Items - You may want to see: Are You Subject to the Limit? Which Itemized Deductions Are Limited? Which Itemized Deductions Are Not Limited? How Do You Figure the Limit?Example. Free state tax Introduction This chapter discusses the overall limit on itemized deductions on Schedule A (Form 1040). Free state tax The following topics are included. Free state tax Who is subject to the limit. Free state tax Which itemized deductions are limited. Free state tax How to figure the limit. Free state tax Useful Items - You may want to see: Forms (and Instructions) Schedule A (Form 1040) Itemized Deductions Are You Subject to the Limit? You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, or $150,000 if married filing separately. Free state tax Your AGI is the amount on Form 1040, line 38. Free state tax Which Itemized Deductions Are Limited? The following Schedule A (Form 1040) deductions are subject to the overall limit on itemized deductions. Free state tax Taxes paid—line 9 Interest paid—lines 10, 11, 12, and 13 Gifts to charity—line 19 Job expenses and certain miscellaneous deductions—line 27 Other miscellaneous deductions—line 28, excluding gambling and casualty or theft losses. Free state tax . Free state tax Which Itemized Deductions Are Not Limited? The following Schedule A (Form 1040) deductions are not subject to the overall limit on itemized deductions. Free state tax However, they are still subject to other applicable limits. Free state tax Medical and dental expenses—line 4. Free state tax Investment interest expense—line 14. Free state tax Casualty and theft losses of personal use property—line 20. Free state tax Casualty and theft losses of income-producing property—line 28. Free state tax Gambling losses—line 28. Free state tax How Do You Figure the Limit? If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the smaller of: 80% of your itemized deductions that are affected by the limit. Free state tax See Which Itemized Deductions Are Limited , earlier, or 3% of the amount by which your AGI exceeds $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, or $150,000 if married filing separately. Free state tax Before you figure the overall limit on itemized deductions, you first must complete Schedule A (Form 1040), lines 1 through 28, including any related forms (such as Form 2106, Form 4684, etc. Free state tax ). Free state tax The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. Free state tax These other limits include charitable contribution limits (chapter 24), the limit on certain meal and entertainment expenses (chapter 26), and the 2%-of-adjusted-gross-income limit on certain miscellaneous deductions (chapter 28). Free state tax Itemized Deductions Worksheet. Free state tax   After you have completed Schedule A (Form 1040) through line 28, you can use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your limit. Free state tax Enter the result on Schedule A (Form 1040), line 29. Free state tax Keep the worksheet for your records. Free state tax    You should compare the amount of your standard deduction to the amount of your itemized deductions after applying the limit. Free state tax Use the greater amount when completing Form 1040, line 40. Free state tax See chapter 20 for information on how to figure your standard deduction. Free state tax Example. Free state tax For tax year 2013 Bill and Terry Willow are filing a joint return on Form 1040. Free state tax Their adjusted gross income on line 38 is $325,500. Free state tax Their Schedule A itemized deductions are as follows: Taxes paid—line 9 $17,900 Interest paid—lines 10, 11, 12, and 13 45,000 Investment interest expense—line 14 41,000 Gifts to charity—line 19 21,000 Job expenses—line 27 17,240 Total $142,140 The Willows’ investment interest expense deduction ($41,000 from Schedule A (Form 1040), line 14) is not subject to the overall limit on itemized deductions. Free state tax The Willows use the Itemized Deductions Worksheet in the Schedule A (Form 1040) instructions to figure their overall limit. Free state tax Of their $142,140 total itemized deductions, the Willows can deduct only $141,375 ($142,140 - $765). Free state tax They enter $141,375 on Schedule A (Form 1040), line 29. Free state tax Prev  Up  Next   Home   More Online Publications
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The Free State Tax

Free state tax Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. Free state tax Adjustment for premium. Free state tax Adjustment for acquisition premium. Free state tax Adjustment for market discount. Free state tax Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. Free state tax “Original issue discount” is defined first. Free state tax The other terms are listed alphabetically. Free state tax Original issue discount (OID). Free state tax   OID is a form of interest. Free state tax It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Free state tax Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Free state tax Accrual period. Free state tax   An accrual period is an interval of time used to measure OID. Free state tax The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Free state tax Acquisition premium. Free state tax   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. Free state tax A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Free state tax See Premium, later. Free state tax Adjusted issue price. Free state tax   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. Free state tax In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Free state tax The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. Free state tax Debt instrument. Free state tax   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). Free state tax It generally does not include an annuity contract. Free state tax Issue price. Free state tax   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. Free state tax Market discount. Free state tax   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. Free state tax An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. Free state tax The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Free state tax Premium. Free state tax   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. Free state tax The premium is the excess of the adjusted basis over the payable amounts. Free state tax See Publication 550 for information on the tax treatment of bond premium. Free state tax Qualified stated interest. Free state tax   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. Free state tax Stated redemption price at maturity. Free state tax   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. Free state tax Yield to maturity (YTM). Free state tax   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. Free state tax The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Free state tax If you do not have this information, consult your broker, tax advisor, or the issuer. Free state tax Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. Free state tax If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. Free state tax The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Free state tax For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. Free state tax The following discussions explain what information is contained in each section of the list. Free state tax Section I. Free state tax   This section contains publicly offered, long-term debt instruments. Free state tax Section I-A: Corporate Debt Instruments Issued Before 1985. Free state tax Section I-B: Corporate Debt Instruments Issued After 1984. Free state tax Section I-C: Inflation-Indexed Debt Instruments. Free state tax For each publicly offered debt instrument in Section I, the list contains the following information. Free state tax The name of the issuer. Free state tax The Committee on Uniform Security Identification Procedures (CUSIP) number. Free state tax The issue date. Free state tax The maturity date. Free state tax The issue price expressed as a percent of principal or of stated redemption price at maturity. Free state tax The annual stated or coupon interest rate. Free state tax (This rate is shown as 0. Free state tax 00 if no annual interest payments are provided. Free state tax ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Free state tax The total OID accrued up to January 1 of a calendar year. Free state tax (This information is not available for every instrument. Free state tax ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. Free state tax The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Free state tax Section II. Free state tax   This section contains stripped coupons and principal components of U. Free state tax S. Free state tax Treasury and Government-Sponsored Enterprise debt instruments. Free state tax These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. Free state tax This section also includes debt instruments backed by U. Free state tax S. Free state tax Treasury securities that represent ownership interests in those securities. Free state tax   The obligations listed in Section II are arranged by maturity date. Free state tax The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Free state tax Section III. Free state tax   This section contains short-term discount obligations. Free state tax Section III-A: Short-Term U. Free state tax S. Free state tax Treasury Bills. Free state tax Section III-B: Federal Home Loan Banks. Free state tax Section III-C: Federal National Mortgage Association. Free state tax Section III-D: Federal Farm Credit Banks. Free state tax Section III-E: Federal Home Loan Mortgage Corporation. Free state tax Section III-F: Federal Agricultural Mortgage Corporation. Free state tax    Information that supplements Section III-A is available on the Internet at http://www. Free state tax treasurydirect. Free state tax gov/tdhome. Free state tax htm. Free state tax   The short-term obligations listed in this section are arranged by maturity date. Free state tax For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. Free state tax Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. Free state tax Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Free state tax U. Free state tax S. Free state tax savings bonds. Free state tax Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Free state tax Obligations issued by tax-exempt organizations. Free state tax OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Free state tax Mortgage-backed securities and mortgage participation certificates. Free state tax Long-term OID debt instruments issued before May 28, 1969. Free state tax Short-term obligations, other than the obligations listed in Section III. Free state tax Debt instruments issued at a discount by states or their political subdivisions. Free state tax REMIC regular interests and CDOs. Free state tax Commercial paper and banker's acceptances issued at a discount. Free state tax Obligations issued at a discount by individuals. Free state tax Foreign obligations not traded in the United States and obligations not issued in the United States. Free state tax Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. Free state tax In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. Free state tax You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. Free state tax See Backup Withholding, later. Free state tax If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. Free state tax File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). Free state tax Electronic payee statements. Free state tax   You can issue Form 1099-OID electronically with the consent of the recipient. Free state tax More information. Free state tax   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. Free state tax Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. Free state tax To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. Free state tax If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Free state tax Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Free state tax If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. Free state tax A special rule is used to determine the original issue price for information reporting on U. Free state tax S. Free state tax Treasury bills (T-bills) listed in Section III-A. Free state tax Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. Free state tax This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Free state tax A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. Free state tax Example 1. Free state tax There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Free state tax The price actually paid by the owner cannot be established by owner or middleman records. Free state tax You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. Free state tax The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Free state tax Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. Free state tax For this purpose, you can rely on Section I of the OID list to determine the following information. Free state tax Whether a debt instrument has OID. Free state tax The OID to be reported on the Form 1099-OID. Free state tax In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Free state tax You also can report OID on other long-term debt instruments. Free state tax Form 1099-OID. Free state tax   On Form 1099-OID for a calendar year show the following information. Free state tax Box 1. Free state tax The OID for the actual dates the owner held the debt instruments during a calendar year. Free state tax To determine this amount, see Figuring OID, next. Free state tax Box 2. Free state tax The qualified stated interest paid or credited during the calendar year. Free state tax Interest reported here is not reported on Form 1099-INT. Free state tax The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Free state tax Box 3. Free state tax Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Free state tax Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Free state tax Box 4. Free state tax Any backup withholding for this debt instrument. Free state tax Box 7. Free state tax The CUSIP number, if any. Free state tax If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. Free state tax 50 2006). Free state tax If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Free state tax Box 8. Free state tax The OID on a U. Free state tax S. Free state tax Treasury obligation for the part of the year the owner held the debt instrument. Free state tax Box 9. Free state tax Investment expenses passed on to holders of a single-class REMIC. Free state tax Boxes 10-12. Free state tax Use to report any state income tax withheld for this debt instrument. Free state tax Figuring OID. Free state tax   You can determine the OID on a long-term debt instrument by using either of the following. Free state tax Section I of the OID list. Free state tax The income tax regulations. Free state tax Using Section I. Free state tax   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Free state tax Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. Free state tax For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Free state tax   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Free state tax Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Free state tax Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Free state tax Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Free state tax Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Free state tax If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Free state tax Report the result on Form 1099-OID in box 1. Free state tax Using the income tax regulations. Free state tax   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Free state tax For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. Free state tax (If you use Section I-B, the OID is figured using 6-month accrual periods. Free state tax )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. Free state tax Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. Free state tax You must file an information return showing the reportable interest and OID, if any, on the CD. Free state tax These rules apply whether or not you sold the CD to the owner. Free state tax Report OID on a CD in the same way as OID on other debt instruments. Free state tax See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Free state tax Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. Free state tax However, do not report the interest if either of the following apply. Free state tax You hold the bond as a nominee for the true owner. Free state tax The payee is a foreign person. Free state tax See Payments to foreign person under Backup Withholding, later. Free state tax Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. Free state tax The coupon may have been “stripped” (separated) from the bond and separately purchased. Free state tax However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. Free state tax Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. Free state tax The backup withholding is deducted at the time a cash payment is made. Free state tax See Pub. Free state tax 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Free state tax Backup withholding generally applies in the following situations. Free state tax The payee does not give you a taxpayer identification number (TIN). Free state tax The IRS notifies you that the payee gave an incorrect TIN. Free state tax The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Free state tax For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. Free state tax However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Free state tax S. Free state tax savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. Free state tax Short-term obligations. Free state tax   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Free state tax However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Free state tax   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. Free state tax However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. Free state tax If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Free state tax Long-term obligations. Free state tax   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Free state tax The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Free state tax The amount to be withheld is limited to the cash paid. Free state tax Registered long-term obligations with cash payments. Free state tax   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Free state tax The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. Free state tax If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. Free state tax For any payment, the required withholding is limited to the cash paid. Free state tax Payee not the original owner. Free state tax   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). Free state tax The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Free state tax Bearer long-term obligations with cash payments. Free state tax   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Free state tax For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. Free state tax For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. Free state tax The required withholding at maturity is limited to the cash paid. Free state tax Sales and redemptions. Free state tax   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. Free state tax Backup withholding applies in the following situations. Free state tax The payee does not give you a TIN. Free state tax The IRS notifies you that the payee gave an incorrect TIN. Free state tax For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. Free state tax Payments outside the United States to U. Free state tax S. Free state tax person. Free state tax   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Free state tax S. Free state tax person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. Free state tax S. Free state tax trade or business. Free state tax Payments to foreign person. Free state tax   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Free state tax U. Free state tax S. Free state tax -source amount. Free state tax   Backup withholding and information reporting are not required for payments of U. Free state tax S. Free state tax -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. Free state tax A U. Free state tax S. Free state tax resident is not a foreign person. Free state tax For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Free state tax Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. Free state tax S. Free state tax person. Free state tax   For information about the 28% withholding tax that may apply to payments of U. Free state tax S. Free state tax -source OID or interest to foreign persons, see Publication 515. Free state tax Foreign-source amount. Free state tax   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Free state tax However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. Free state tax More information. Free state tax   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Free state tax 6049-5. Free state tax Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Free state tax It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Free state tax It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. Free state tax However, the information provided does not cover every situation. Free state tax More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Free state tax Including OID in income. Free state tax   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Free state tax Exceptions. Free state tax   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Free state tax U. Free state tax S. Free state tax savings bonds. Free state tax Tax-exempt obligations. Free state tax (However, see Tax-Exempt Bonds and Coupons, later. Free state tax ) Obligations issued by individuals before March 2, 1984. Free state tax Loans of $10,000 or less between individuals who are not in the business of lending money. Free state tax (The dollar limit includes outstanding prior loans by the lender to the borrower. Free state tax ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Free state tax   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Free state tax Publication 550 also discusses rules for holders of REMIC interests and CDOs. Free state tax De minimis rule. Free state tax   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Free state tax 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Free state tax Debt instruments with de minimis OID are not listed in this publication. Free state tax There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Free state tax Also, the de minimis rules generally do not apply to tax-exempt obligations. Free state tax Example 2. Free state tax You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Free state tax One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Free state tax Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Free state tax Example 3. Free state tax Assume the same facts as Example 2, except the debt instrument was issued at $950. Free state tax You must report part of the $50 OID each year because it is more than $25. Free state tax Choice to report all interest as OID. Free state tax   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. Free state tax See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Free state tax   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. Free state tax For more information, see Regulations section 1. Free state tax 1272-3. Free state tax Purchase after date of original issue. Free state tax   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Free state tax If so, the OID reported to you on Form 1099-OID may have to be adjusted. Free state tax For more information, see Showing an OID adjustment under How To Report OID, later. Free state tax The following rules generally do not apply to contingent payment debt instruments. Free state tax Adjustment for premium. Free state tax   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Free state tax Your adjustment is the total OID shown on your Form 1099-OID. Free state tax Adjustment for acquisition premium. Free state tax   If your debt instrument has acquisition premium, reduce the OID you report. Free state tax Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. Free state tax Adjustment for market discount. Free state tax   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Free state tax Your adjustment is the accrued market discount for the year. Free state tax See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. Free state tax If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Free state tax The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Free state tax For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Free state tax 1275-7. Free state tax Sale, exchange, or redemption. Free state tax   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. Free state tax If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Free state tax Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Free state tax   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Free state tax Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Free state tax In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Free state tax   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Free state tax Example 4. Free state tax Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Free state tax 00 on November 1 of Year 1. Free state tax The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Free state tax The debt instrument provides for semiannual payments of interest at 10%. Free state tax Assume the debt instrument is a capital asset in Larry's hands. Free state tax The debt instrument has $13,765. Free state tax 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Free state tax 00 issue price). Free state tax Larry sold the debt instrument for $90,000 on November 1 of Year 4. Free state tax Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Free state tax 00 of OID in income and has increased his basis by that amount to $90,791. Free state tax 00. Free state tax Larry has realized a loss of $791. Free state tax 00. Free state tax All of Larry's loss is capital loss. Free state tax Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Free state tax Form 1099-OID shows all OID income in box 1 except OID on a U. Free state tax S. Free state tax Treasury obligation, which is shown in box 8. Free state tax It also shows, in box 2, any qualified stated interest you must include in income. Free state tax (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Free state tax ) A copy of Form 1099-OID will be sent to the IRS. Free state tax Do not attach your copy to your tax return. Free state tax Keep it for your records. Free state tax If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. Free state tax A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. Free state tax Form 1099-OID not received. Free state tax   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. Free state tax Refiguring OID. Free state tax   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. Free state tax You bought the debt instrument at a premium or at an acquisition premium. Free state tax The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Free state tax S. Free state tax Treasury securities). Free state tax The debt instrument is a contingent payment or inflation-indexed debt instrument. Free state tax See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Free state tax Refiguring interest. Free state tax   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. Free state tax Nominee. Free state tax   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. Free state tax ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Free state tax Show the owner of the debt instrument as the “recipient” and you as the “payer. Free state tax ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Free state tax You must also give a copy of the Form 1099-OID to the actual owner. Free state tax However, you are not required to file a nominee return to show amounts belonging to your spouse. Free state tax See the Form 1099 instructions for more information. Free state tax   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Free state tax How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. Free state tax Form 1040 or Form 1040A required. Free state tax   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Free state tax You received a Form 1099-OID as a nominee for the actual owner. Free state tax Your total interest and OID income for the year was more than $1,500. Free state tax Form 1040 required. Free state tax   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. Free state tax For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Free state tax Also, you must use Form 1040 if you were charged an early withdrawal penalty. Free state tax Where to report. Free state tax   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Free state tax Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Free state tax Also include any other OID and interest income for which you did not receive a Form 1099. Free state tax Showing an OID adjustment. Free state tax   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. Free state tax   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. Free state tax If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Free state tax Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Free state tax Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Free state tax Subtract that OID from the subtotal and enter the result on line 2. Free state tax If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Free state tax Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Free state tax Below the subtotal, write “OID Adjustment” and show the additional OID. Free state tax Add that OID to the subtotal and enter the result on line 2. Free state tax Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. Free state tax It also may depend on the type of the debt instrument. Free state tax There are different rules for each of the following debt instruments. Free state tax Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Free state tax Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Free state tax Debt instruments issued after July 1, 1982, and before 1985. Free state tax Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Free state tax Contingent payment debt instruments issued after August 12, 1996. Free state tax Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Free state tax Zero coupon bonds. Free state tax   The rules for figuring OID on zero coupon bonds backed by U. Free state tax S. Free state tax Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Free state tax Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. Free state tax The OID, which is taxed as ordinary income, generally equals the following amount. Free state tax   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. Free state tax If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Free state tax Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. Free state tax For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Free state tax Your basis in the debt instrument is increased by the OID you include in income. Free state tax Form 1099-OID. Free state tax   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Free state tax However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Free state tax See Reduction for acquisition premium, later. Free state tax If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Free state tax irs. Free state tax gov/pub1212 by clicking the link under Recent Developments. Free state tax Form 1099-OID not received. Free state tax    The OID listed is for each $1,000 of redemption price. Free state tax You must adjust the listed amount if your debt instrument has a different principal amount. Free state tax For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Free state tax   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Free state tax (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. Free state tax ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Free state tax Divide the OID shown by 12. Free state tax Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. Free state tax This is the OID to include in income unless you paid an acquisition premium. Free state tax The reduction for acquisition premium is discussed next. Free state tax Reduction for acquisition premium. Free state tax   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Free state tax Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. Free state tax This is the monthly OID. Free state tax Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Free state tax (If the result is zero or less, stop here. Free state tax You did not pay an acquisition premium. Free state tax ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. Free state tax Subtract the amount figured in (3) from the amount figured in (1). Free state tax This is the OID to include in income for each month you hold the debt instrument during the year. Free state tax Transfers during the month. Free state tax   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Free state tax Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Free state tax Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. Free state tax For information about showing the correct OID on your tax return, see How To Report OID, earlier. Free state tax Form 1099-OID. Free state tax   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Free state tax However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Free state tax See Constant yield method and the discussions on acquisition premium that follow, later. Free state tax If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Free state tax irs. Free state tax gov/pub1212 by clicking the link under Recent Developments. Free state tax Form 1099-OID not received. Free state tax    The OID listed is for each $1,000 of redemption price. Free state tax You must adjust the listed amount if your debt instrument has a different principal amount. Free state tax For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Free state tax   If you held the debt instrument the entire year, use the OID shown in Section I-A. Free state tax (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Free state tax ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Free state tax Method 1. Free state tax    Divide the total OID for a calendar year by 365 (366 for leap years). Free state tax Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Free state tax  This computation is an approximation and may result in a slightly higher OID than Method 2. Free state tax Method 2. Free state tax    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Free state tax (See Accrual period under Constant yield method, next. Free state tax ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Free state tax If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Free state tax Add the results of (2) and (3). Free state tax This is the OID to include in income, unless you paid an acquisition premium. Free state tax (The reduction for acquisition premium is discussed later. Free state tax ) Constant yield method. Free state tax   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Free state tax OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Free state tax   Figure the OID allocable to any accrual period as follows. Free state tax Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Free state tax Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Free state tax Accrual period. Free state tax   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Free state tax Your tax year will usually include parts of two accrual periods. Free state tax Daily OID. Free state tax   The OID for any accrual period is allocated equally to each day in the accrual period. Free state tax You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Free state tax If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Free state tax Figuring daily OID. Free state tax   The daily OID for the initial accrual period is figured using the following formula. Free state tax   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Free state tax Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Free state tax   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Free state tax Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. Free state tax Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Free state tax   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Free state tax However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Free state tax To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Free state tax The numerator is the acquisition premium. Free state tax The denominator is the total OID remaining for the debt instrument after your purchase date. Free state tax Section I-A is available at www. Free state tax irs. Free state tax gov/pub1212 and clicking the link under Recent Developments. Free state tax Using Section I-A to figure accumulated OID. Free state tax   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. Free state tax The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Free state tax The OID from January 1 of a calendar year to the date of purchase, figured as follows. Free state tax Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. Free state tax Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. Free state tax Add the amounts figured in (2a) and (2b). Free state tax Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. Free state tax You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Free state tax Your basis in the debt instrument is increased by the OID you include in income. Free state tax For information about showing the correct OID on your tax return, see How To Report OID, earlier. Free state tax Form 1099-OID. Free state tax   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Free state tax However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Free state tax See Constant yield method and Reduction for acquisition premium, later. Free state tax   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. Free state tax See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Free state tax If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. Free state tax irs. Free state tax gov/pub1212 by clicking the link under Recent Developments. Free state tax Form 1099-OID not received. Free state tax   The OID listed is for each $1,000 of redemption price. Free state tax You must adjust the listed amount if your debt instrument has a different principal amount. Free state tax For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Free state tax   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Free state tax (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Free state tax ) If you did not hold the debt instrument the entire year, figure your OID as follows. Free state tax Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Free state tax (See Accrual period under Constant yield method, later. Free state tax ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Free state tax Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Free state tax Add the results of (2) and (3). Free state tax This is the OID to include in income for that year, unless you paid an acquisition premium. Free state tax (The reduction for acquisition premium is discussed later. Free state tax ) Tax-exempt bond. Free state tax   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Free state tax You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Free state tax In general, use the rules that follow to determine your OID. Free state tax Constant yield method. Free state tax   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Free state tax (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Free state tax ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Free state tax   Figure the OID allocable to any accrual period as follows. Free state tax Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Free state tax The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Free state tax The yield must be stated appropriately taking into account the length of the particular accrual period. Free state tax Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Free state tax Accrual period. Free state tax   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. Free state tax For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Free state tax Any short period is included as the first accrual period. Free state tax   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. Free state tax However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Free state tax Daily OID. Free state tax   The OID for any accrual period is allocated equally to each day in the accrual period. Free state tax Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Free state tax Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. Free state tax If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. Free state tax Figuring daily OID. Free state tax   The daily OID for the initial accrual period is figured using the following formula. Free state tax   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Free state tax Example 5. Free state tax On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Free state tax 17. Free state tax According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Free state tax The yield to maturity is 12%, compounded semiannually. Free state tax The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Free state tax The accrual periods are the 6-month periods ending on each of these dates. Free state tax The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Free state tax The daily OID for the first accrual period is figured as follows. Free state tax   ($86,235. Free state tax 17 x . Free state tax 12/2) – $5,000     181 days     = $174. Free state tax 11020 = $. Free state tax 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. Free state tax 17 + $174. Free state tax 11), or $86,409. Free state tax 28. Free state tax The number of days for the second accrual period (July 1 through December 31) is 184 days. Free state tax The daily OID for the second accrual period is figured as follows. Free state tax   ($86,409. Free state tax 28 x . Free state tax 12/2) – $5,000     184 days     = $184. Free state tax 55681 = $1. Free state tax 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. Free state tax 11 ($. Free state tax 95665 × 182 days) plus $184. Free state tax 56 ($1. Free state tax 00303 × 184 days), or $358. Free state tax 67. Free state tax Add the OID to the $10,000 interest you report on your income tax return for Year 1. Free state tax Example 6. Free state tax Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Free state tax Also, the interest payment dates are October 31 and April 30 of each calendar year. Free state tax The accrual periods are the 6-month periods ending on each of these dates. Free state tax The number of days for the first accrual period (May 1 through October 31) is 184 days. Free state tax The daily OID for the first accrual period is figured as follows. Free state tax   ($86,235. Free state tax 17 x . Free state tax 12/2) – $5,000     184 days     = $174. Free state tax 11020 = $. Free state tax 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Free state tax The daily OID for the second accrual period is figured as follows. Free state tax   ($86,409. Free state tax 28 x . Free state tax 12/2) – $5,000     181 days     = $184. Free state tax 55681 = $1. Free state tax 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Free state tax 31 of OID in income. Free state tax This is $174. Free state tax 11 ($. Free state tax 94625 × 184 days) for the period May 1 through October 31 plus $62. Free state tax 20 ($1. Free state tax 01965 × 61 days) for the period November 1 through December 31. Free state tax The OID is added to the $5,000 interest income paid on October 31 of Year 1. Free state tax Your basis in the debt instrument is increased by the OID you include in income. Free state tax On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Free state tax 48 ($86,235. Free state tax 17 + $236. Free state tax 31). Free state tax Short first accrual period. Free state tax   You may have to make adjustments if a debt instrument has a short first accrual period. Free state tax For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. Free state tax (The remaining accrual periods begin on May 1 and November 1. Free state tax ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Free state tax You may use any reasonable compounding method in determining OID for a short period. Free state tax Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Free state tax Consult your tax advisor for more information about making this computation. Free state tax   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Free state tax Reduction for acquisition premium. Free state tax   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Free state tax To figure the daily acquisition premium, multiply the daily OID by the following fraction. Free state tax The numerator is the acquisition premium. Free state tax The denominator is the total OID remaining for the debt instrument after your purchase date. Free state tax Example 7. Free state tax Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. Free state tax The adjusted issue price on November 1 of Year 1 is $86,409. Free state tax 28 ($86,235. Free state tax 17 + $174. Free state tax 11). Free state tax In this case, you paid an acquisition premium of $590. Free state tax 72 ($87,000 − $86,409. Free state tax 28). Free state tax The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Free state tax 1) Daily OID on date of purchase (2nd accrual period) $1. Free state tax 01965*  2)  Acquisition premium $590. Free state tax 72    3)  Total OID remaining after purchase date ($13,764. Free state tax 83 − $174. Free state tax 11) 13,590. Free state tax 72   4) Line 2 ÷ line 3 . Free state tax 04346  5)  Line 1 × line 4 . Free state tax 04432  6)  Daily OID reduced for the acquisition premium. Free state tax Line 1 − line 5 $0. Free state tax 97533  * As shown in Example 6. Free state tax The total OID to include in income for Year 1 is $59. Free state tax 50 ($. Free state tax 97533 × 61 days). Free state tax Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. Free state tax In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Free state tax If you hold a contingent payment bond, you must report OID as it accrues each year. Free state tax Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. Free state tax To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Free state tax Noncontingent bond method. Free state tax    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. Free state tax In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Free state tax When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Free state tax If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Free state tax If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Free state tax Form 1099-OID. Free state tax   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. Free state tax For example, the amount may not be correct if the contingent payment was different from the projected amount. Free state tax If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Free state tax For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Free state tax Figuring OID. Free state tax   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Free state tax The issuer must make these available to you. Free state tax Comparable yield. Free state tax   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. Free state tax The comparable yield is determined as of the debt instrument's issue date. Free state tax Projected payment schedule. Free state tax   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. Free state tax The projected payment schedule is created by the issuer as of the debt instrument's issue date. Free state tax It is used to determine the issuer's and holder's interest accruals and adjustments. Free state tax Steps for figuring OID. Free state tax   Figure the OID on a contingent payment debt instrument in two steps. Free state tax Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Free state tax Use the comparable yield as the yield to maturity. Free state tax In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Free state tax Do not treat any amount payable as qualified stated interest. Free state tax Adjust the OID in (1) to account for actual contingent payments. Free state tax If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Free state tax If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Free state tax Net positive adjustment. Free state tax   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Free state tax Treat a net positive adjustment as additional OID for the tax year. Free state tax Net negative adjustment. Free state tax   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Free state tax Use a net negative adjustment to offset OID on the debt instrument for the tax year. Free state tax If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. Free state tax However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. Free state tax You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. Free state tax Basis adjustments. Free state tax   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Free state tax Your basis, however, is not affected by any negative or positive adjustments. Free state tax Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Free state tax Treatment of gain or loss on sale or exchange. Free state tax   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. Free state tax If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. Free state tax If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Free state tax See Regulations section 1. Free state tax 1275-4 for exceptions to these rules. Free state tax Premium, acquisition premium, and market discount. Free state tax   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Free state tax See Regulations section 1. Free state tax 1275-4 to determine how to account for these items. Free state tax Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Free state tax An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d