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Hr block com 8. Hr block com   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. Hr block com Reporting tax withheld. Hr block com Nominees. Hr block com Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. Hr block com Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. Hr block com Alternative minimum tax treatment. Hr block com How To Report Dividend IncomeInvestment interest deducted. Hr block com Reminder Foreign-source income. Hr block com  If you are a U. Hr block com S. Hr block com citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. Hr block com S. Hr block com law. Hr block com This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. Hr block com Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. Hr block com This chapter also explains how to report dividend income on your tax return. Hr block com Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. Hr block com You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Hr block com However, some amounts you receive that are called dividends are actually interest income. Hr block com (See Dividends that are actually interest under Taxable Interest in chapter 7. Hr block com ) Most distributions are paid in cash (or check). Hr block com However, distributions can consist of more stock, stock rights, other property, or services. Hr block com Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. Hr block com Tax on unearned income of certain children. Hr block com   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Hr block com If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. Hr block com If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Hr block com    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Hr block com Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. Hr block com   For more information about the tax on unearned income of children and the parents' election, see chapter 31. Hr block com Beneficiary of an estate or trust. Hr block com    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. Hr block com You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Hr block com , from the fiduciary. Hr block com Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Hr block com Social security number (SSN) or individual taxpayer identification number (ITIN). Hr block com    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. Hr block com This includes payers of dividends. Hr block com If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. Hr block com For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Hr block com Backup withholding. Hr block com   Your dividend income is generally not subject to regular withholding. Hr block com However, it may be subject to backup withholding to ensure that income tax is collected on the income. Hr block com Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Hr block com   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. Hr block com For more information, see Backup Withholding in chapter 4. Hr block com Stock certificate in two or more names. Hr block com   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. Hr block com Form 1099-DIV. Hr block com   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. Hr block com Keep this form with your records. Hr block com You do not have to attach it to your tax return. Hr block com Dividends not reported on Form 1099-DIV. Hr block com   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. Hr block com For example, you may receive distributive shares of dividends from partnerships or S corporations. Hr block com These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Hr block com , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Hr block com Reporting tax withheld. Hr block com   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. Hr block com Nominees. Hr block com   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. Hr block com Form 1099-MISC. Hr block com   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. Hr block com See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. Hr block com Incorrect amount shown on a Form 1099. Hr block com   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Hr block com The new Form 1099 you receive will be marked “Corrected. Hr block com ” Dividends on stock sold. Hr block com   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. Hr block com Dividends received in January. Hr block com   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. Hr block com You report the dividend in the year it was declared. Hr block com Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. Hr block com They are paid out of earnings and profits and are ordinary income to you. Hr block com This means they are not capital gains. Hr block com You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Hr block com Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. Hr block com Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. Hr block com They should be shown in box 1b of the Form 1099-DIV you receive. Hr block com The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. Hr block com 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. Hr block com 6%. Hr block com 20% on any amount that otherwise would be taxed at a 39. Hr block com 6% rate. Hr block com To qualify for the maximum rate, all of the following requirements must be met. Hr block com The dividends must have been paid by a U. Hr block com S. Hr block com corporation or a qualified foreign corporation. Hr block com (See Qualified foreign corporation , later. Hr block com ) The dividends are not of the type listed later under Dividends that are not qualified dividends . Hr block com You meet the holding period (discussed next). Hr block com Holding period. Hr block com   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Hr block com The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Hr block com Instead, the seller will get the dividend. Hr block com   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. Hr block com See the examples later. Hr block com Exception for preferred stock. Hr block com   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. Hr block com If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. Hr block com Example 1. Hr block com You bought 5,000 shares of XYZ Corp. Hr block com common stock on July 9, 2013. Hr block com XYZ Corp. Hr block com paid a cash dividend of 10 cents per share. Hr block com The ex-dividend date was July 16, 2013. Hr block com Your Form 1099-DIV from XYZ Corp. Hr block com shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). Hr block com However, you sold the 5,000 shares on August 12, 2013. Hr block com You held your shares of XYZ Corp. Hr block com for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). Hr block com The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. Hr block com You have no qualified dividends from XYZ Corp. Hr block com because you held the XYZ stock for less than 61 days. Hr block com Example 2. Hr block com Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. Hr block com You held the stock for 63 days (from July 16, 2013, through September 16, 2013). Hr block com The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). Hr block com Example 3. Hr block com You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. Hr block com ABC Mutual Fund paid a cash dividend of 10 cents a share. Hr block com The ex-dividend date was July 16, 2013. Hr block com The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Hr block com Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. Hr block com However, you sold the 10,000 shares on August 12, 2013. Hr block com You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. Hr block com Holding period reduced where risk of loss is diminished. Hr block com   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. Hr block com You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. Hr block com You were grantor (writer) of an option to buy substantially identical stock or securities. Hr block com Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. Hr block com   For information about how to apply condition (3), see Regulations section 1. Hr block com 246-5. Hr block com Qualified foreign corporation. Hr block com   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. Hr block com The corporation is incorporated in a U. Hr block com S. Hr block com possession. Hr block com The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. Hr block com For a list of those treaties, see Table 8-1. Hr block com The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. Hr block com See Readily tradable stock , later. Hr block com Exception. Hr block com   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. Hr block com Readily tradable stock. Hr block com   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. Hr block com For a list of the exchanges that meet these requirements, see www. Hr block com sec. Hr block com gov/divisions/marketreg/mrexchanges. Hr block com shtml. Hr block com Dividends that are not qualified dividends. Hr block com   The following dividends are not qualified dividends. Hr block com They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. Hr block com Capital gain distributions. Hr block com Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. Hr block com S. Hr block com building and loan associations, U. Hr block com S. Hr block com savings and loan associations, federal savings and loan associations, and similar financial institutions. Hr block com (Report these amounts as interest income. Hr block com ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. Hr block com Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. Hr block com Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Hr block com Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Hr block com Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Hr block com Table 8-1. Hr block com Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. Hr block com Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. Hr block com This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Hr block com Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. Hr block com If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. Hr block com If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. Hr block com You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. Hr block com But you may be able to deduct the service charge. Hr block com See chapter 28 for more information about deducting expenses of producing income. Hr block com In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. Hr block com If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. Hr block com When figuring this amount, use the fair market value of the stock on the dividend payment date. Hr block com Money Market Funds Report amounts you receive from money market funds as dividend income. Hr block com Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. Hr block com Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). Hr block com They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. Hr block com Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. Hr block com Undistributed capital gains of mutual funds and REITs. Hr block com    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. Hr block com You must treat your share of these gains as distributions, even though you did not actually receive them. Hr block com However, they are not included on Form 1099-DIV. Hr block com Instead, they are reported to you in box 1a of Form 2439. Hr block com   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. Hr block com   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. Hr block com You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. Hr block com Attach Copy B of Form 2439 to your return, and keep Copy C for your records. Hr block com Basis adjustment. Hr block com   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. Hr block com Additional information. Hr block com   For more information on the treatment of distributions from mutual funds, see Publication 550. Hr block com Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. Hr block com You should receive a Form 1099-DIV or other statement showing the nondividend distribution. Hr block com On Form 1099-DIV, a nondividend distribution will be shown in box 3. Hr block com If you do not receive such a statement, you report the distribution as an ordinary dividend. Hr block com Basis adjustment. Hr block com   A nondividend distribution reduces the basis of your stock. Hr block com It is not taxed until your basis in the stock is fully recovered. Hr block com This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. Hr block com If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. Hr block com   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Hr block com Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. Hr block com See Holding Period in chapter 14. Hr block com Example. Hr block com You bought stock in 2000 for $100. Hr block com In 2003, you received a nondividend distribution of $80. Hr block com You did not include this amount in your income, but you reduced the basis of your stock to $20. Hr block com You received a nondividend distribution of $30 in 2013. Hr block com The first $20 of this amount reduced your basis to zero. Hr block com You report the other $10 as a long-term capital gain for 2013. Hr block com You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. Hr block com Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. Hr block com These distributions are, at least in part, one form of a return of capital. Hr block com They may be paid in one or more installments. Hr block com You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. Hr block com For more information on liquidating distributions, see chapter 1 of Publication 550. Hr block com Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. Hr block com Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. Hr block com Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. Hr block com Taxable stock dividends and stock rights. Hr block com   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. Hr block com You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. Hr block com The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. Hr block com The distribution is in convertible preferred stock and has the same result as in (2). Hr block com The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. Hr block com The distribution is on preferred stock. Hr block com (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. Hr block com )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. Hr block com If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. Hr block com Preferred stock redeemable at a premium. Hr block com   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. Hr block com For more information, see chapter 1 of Publication 550. Hr block com Basis. Hr block com   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. Hr block com If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. Hr block com Fractional shares. Hr block com    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. Hr block com However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. Hr block com Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Hr block com Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Hr block com Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. Hr block com    Report these transactions on Form 8949 with the correct box checked. Hr block com   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. Hr block com Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Hr block com Example. Hr block com You own one share of common stock that you bought on January 3, 2004, for $100. Hr block com The corporation declared a common stock dividend of 5% on June 29, 2013. Hr block com The fair market value of the stock at the time the stock dividend was declared was $200. Hr block com You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. Hr block com You figure your gain or loss as follows: Fair market value of old stock $200. Hr block com 00 Fair market value of stock dividend (cash received) +10. Hr block com 00 Fair market value of old stock and stock dividend $210. Hr block com 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. Hr block com 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. Hr block com 76 Total $100. Hr block com 00 Cash received $10. Hr block com 00 Basis (cost) of stock dividend − 4. Hr block com 76 Gain $5. Hr block com 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. Hr block com Scrip dividends. Hr block com   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. Hr block com The certificate is generally nontaxable when you receive it. Hr block com If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. Hr block com   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. Hr block com You must include its fair market value in income on the date you receive it. Hr block com Other Distributions You may receive any of the following distributions during the year. Hr block com Exempt-interest dividends. Hr block com   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Hr block com Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Hr block com Information reporting requirement. Hr block com   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. Hr block com This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. Hr block com Alternative minimum tax treatment. Hr block com   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Hr block com See Alternative Minimum Tax (AMT) in chapter 30 for more information. Hr block com Dividends on insurance policies. Hr block com    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. Hr block com However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. Hr block com    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Hr block com Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. Hr block com Report any taxable distributions on insurance policies on Form 1040, line 21. Hr block com Dividends on veterans' insurance. Hr block com   Dividends you receive on veterans' insurance policies are not taxable. Hr block com In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. Hr block com Patronage dividends. Hr block com   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. Hr block com   Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use in your business. Hr block com But you must reduce the basis (cost) of the items bought. Hr block com If the dividend is more than the adjusted basis of the assets, you must report the excess as income. Hr block com   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. Hr block com Alaska Permanent Fund dividends. Hr block com    Do not report these amounts as dividends. Hr block com Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. Hr block com How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Hr block com Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Hr block com Report qualified dividends on line 9b of Form 1040 or Form 1040A. Hr block com If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. Hr block com See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. Hr block com If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. Hr block com You cannot use Form 1040EZ if you receive any dividend income. Hr block com Form 1099-DIV. Hr block com   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. Hr block com Even if you do not receive Form 1099-DIV, you must report all your dividend income. Hr block com   See Form 1099-DIV for more information on how to report dividend income. Hr block com Form 1040A or 1040. Hr block com    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. Hr block com If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. Hr block com   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. Hr block com If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. Hr block com If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. Hr block com   Enter on line 6 the total of the amounts listed on line 5. Hr block com Also enter this total on line 9a of Form 1040A or 1040. Hr block com Qualified dividends. Hr block com   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. Hr block com The amount in box 1b is already included in box 1a. Hr block com Do not add the amount in box 1b to, or substract it from, the amount in box 1a. Hr block com   Do not include any of the following on line 9b. Hr block com Qualified dividends you received as a nominee. Hr block com See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. Hr block com Dividends on stock for which you did not meet the holding period. Hr block com See Holding period , earlier under Qualified Dividends. Hr block com Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Hr block com Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Hr block com Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Hr block com   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. Hr block com Enter qualified dividends on line 2 of the worksheet. Hr block com Investment interest deducted. Hr block com   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Hr block com Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. Hr block com This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. Hr block com For more information about the limit on investment interest, see Investment expenses in chapter 23. Hr block com Expenses related to dividend income. Hr block com   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). Hr block com See chapter 28 for general information about deducting expenses of producing income. Hr block com More information. Hr block com    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. Hr block com Prev  Up  Next   Home   More Online Publications
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Hr block com 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. Hr block com Adjustment for premium. Hr block com Adjustment for acquisition premium. Hr block com Adjustment for market discount. Hr block com 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. Hr block com “Original issue discount” is defined first. Hr block com The other terms are listed alphabetically. Hr block com Original issue discount (OID). Hr block com   OID is a form of interest. Hr block com 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). Hr block com Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Hr block com Accrual period. Hr block com   An accrual period is an interval of time used to measure OID. Hr block com The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Hr block com Acquisition premium. Hr block com   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. Hr block com A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Hr block com See Premium, later. Hr block com Adjusted issue price. Hr block com   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. Hr block com In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Hr block com 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. Hr block com Debt instrument. Hr block com   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). Hr block com It generally does not include an annuity contract. Hr block com Issue price. Hr block com   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. Hr block com Market discount. Hr block com   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. Hr block com 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. Hr block com The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Hr block com Premium. Hr block com   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. Hr block com The premium is the excess of the adjusted basis over the payable amounts. Hr block com See Publication 550 for information on the tax treatment of bond premium. Hr block com Qualified stated interest. Hr block com   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. Hr block com Stated redemption price at maturity. Hr block com   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. Hr block com Yield to maturity (YTM). Hr block com   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. Hr block com The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Hr block com If you do not have this information, consult your broker, tax advisor, or the issuer. Hr block com 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. Hr block com 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. Hr block com The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Hr block com 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. Hr block com The following discussions explain what information is contained in each section of the list. Hr block com Section I. Hr block com   This section contains publicly offered, long-term debt instruments. Hr block com Section I-A: Corporate Debt Instruments Issued Before 1985. Hr block com Section I-B: Corporate Debt Instruments Issued After 1984. Hr block com Section I-C: Inflation-Indexed Debt Instruments. Hr block com For each publicly offered debt instrument in Section I, the list contains the following information. Hr block com The name of the issuer. Hr block com The Committee on Uniform Security Identification Procedures (CUSIP) number. Hr block com The issue date. Hr block com The maturity date. Hr block com The issue price expressed as a percent of principal or of stated redemption price at maturity. Hr block com The annual stated or coupon interest rate. Hr block com (This rate is shown as 0. Hr block com 00 if no annual interest payments are provided. Hr block com ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Hr block com The total OID accrued up to January 1 of a calendar year. Hr block com (This information is not available for every instrument. Hr block com ) 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. Hr block com The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Hr block com Section II. Hr block com   This section contains stripped coupons and principal components of U. Hr block com S. Hr block com Treasury and Government-Sponsored Enterprise debt instruments. Hr block com 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. Hr block com This section also includes debt instruments backed by U. Hr block com S. Hr block com Treasury securities that represent ownership interests in those securities. Hr block com   The obligations listed in Section II are arranged by maturity date. Hr block com The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Hr block com Section III. Hr block com   This section contains short-term discount obligations. Hr block com Section III-A: Short-Term U. Hr block com S. Hr block com Treasury Bills. Hr block com Section III-B: Federal Home Loan Banks. Hr block com Section III-C: Federal National Mortgage Association. Hr block com Section III-D: Federal Farm Credit Banks. Hr block com Section III-E: Federal Home Loan Mortgage Corporation. Hr block com Section III-F: Federal Agricultural Mortgage Corporation. Hr block com    Information that supplements Section III-A is available on the Internet at http://www. Hr block com treasurydirect. Hr block com gov/tdhome. Hr block com htm. Hr block com   The short-term obligations listed in this section are arranged by maturity date. Hr block com 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. Hr block com 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. Hr block com Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Hr block com U. Hr block com S. Hr block com savings bonds. Hr block com Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Hr block com Obligations issued by tax-exempt organizations. Hr block com OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Hr block com Mortgage-backed securities and mortgage participation certificates. Hr block com Long-term OID debt instruments issued before May 28, 1969. Hr block com Short-term obligations, other than the obligations listed in Section III. Hr block com Debt instruments issued at a discount by states or their political subdivisions. Hr block com REMIC regular interests and CDOs. Hr block com Commercial paper and banker's acceptances issued at a discount. Hr block com Obligations issued at a discount by individuals. Hr block com Foreign obligations not traded in the United States and obligations not issued in the United States. Hr block com 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. Hr block com 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. Hr block com 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. Hr block com See Backup Withholding, later. Hr block com 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. Hr block com 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). Hr block com Electronic payee statements. Hr block com   You can issue Form 1099-OID electronically with the consent of the recipient. Hr block com More information. Hr block com   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. Hr block com 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. Hr block com 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. Hr block com If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Hr block com Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Hr block com 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. Hr block com A special rule is used to determine the original issue price for information reporting on U. Hr block com S. Hr block com Treasury bills (T-bills) listed in Section III-A. Hr block com 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. Hr block com This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Hr block com 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. Hr block com Example 1. Hr block com There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Hr block com The price actually paid by the owner cannot be established by owner or middleman records. Hr block com 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. Hr block com The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Hr block com 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. Hr block com For this purpose, you can rely on Section I of the OID list to determine the following information. Hr block com Whether a debt instrument has OID. Hr block com The OID to be reported on the Form 1099-OID. Hr block com In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Hr block com You also can report OID on other long-term debt instruments. Hr block com Form 1099-OID. Hr block com   On Form 1099-OID for a calendar year show the following information. Hr block com Box 1. Hr block com The OID for the actual dates the owner held the debt instruments during a calendar year. Hr block com To determine this amount, see Figuring OID, next. Hr block com Box 2. Hr block com The qualified stated interest paid or credited during the calendar year. Hr block com Interest reported here is not reported on Form 1099-INT. Hr block com The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Hr block com Box 3. Hr block com Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Hr block com Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Hr block com Box 4. Hr block com Any backup withholding for this debt instrument. Hr block com Box 7. Hr block com The CUSIP number, if any. Hr block com 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. Hr block com 50 2006). Hr block com If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Hr block com Box 8. Hr block com The OID on a U. Hr block com S. Hr block com Treasury obligation for the part of the year the owner held the debt instrument. Hr block com Box 9. Hr block com Investment expenses passed on to holders of a single-class REMIC. Hr block com Boxes 10-12. Hr block com Use to report any state income tax withheld for this debt instrument. Hr block com Figuring OID. Hr block com   You can determine the OID on a long-term debt instrument by using either of the following. Hr block com Section I of the OID list. Hr block com The income tax regulations. Hr block com Using Section I. Hr block com   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Hr block com 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. Hr block com For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Hr block com   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Hr block com Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Hr block com Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Hr block com Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Hr block com Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Hr block com If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Hr block com Report the result on Form 1099-OID in box 1. Hr block com Using the income tax regulations. Hr block com   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Hr block com 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. Hr block com (If you use Section I-B, the OID is figured using 6-month accrual periods. Hr block com )   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. Hr block com 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. Hr block com You must file an information return showing the reportable interest and OID, if any, on the CD. Hr block com These rules apply whether or not you sold the CD to the owner. Hr block com Report OID on a CD in the same way as OID on other debt instruments. Hr block com See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Hr block com 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. Hr block com However, do not report the interest if either of the following apply. Hr block com You hold the bond as a nominee for the true owner. Hr block com The payee is a foreign person. Hr block com See Payments to foreign person under Backup Withholding, later. Hr block com 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. Hr block com The coupon may have been “stripped” (separated) from the bond and separately purchased. Hr block com 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. Hr block com 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%. Hr block com The backup withholding is deducted at the time a cash payment is made. Hr block com See Pub. Hr block com 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Hr block com Backup withholding generally applies in the following situations. Hr block com The payee does not give you a taxpayer identification number (TIN). Hr block com The IRS notifies you that the payee gave an incorrect TIN. Hr block com The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Hr block com 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. Hr block com However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Hr block com S. Hr block com 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. Hr block com Short-term obligations. Hr block com   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Hr block com However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Hr block com   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. Hr block com 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. Hr block com If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Hr block com Long-term obligations. Hr block com   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Hr block com The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Hr block com The amount to be withheld is limited to the cash paid. Hr block com Registered long-term obligations with cash payments. Hr block com   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Hr block com 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. Hr block com 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. Hr block com For any payment, the required withholding is limited to the cash paid. Hr block com Payee not the original owner. Hr block com   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). Hr block com The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Hr block com Bearer long-term obligations with cash payments. Hr block com   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Hr block com 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. Hr block com 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. Hr block com The required withholding at maturity is limited to the cash paid. Hr block com Sales and redemptions. Hr block com   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. Hr block com Backup withholding applies in the following situations. Hr block com The payee does not give you a TIN. Hr block com The IRS notifies you that the payee gave an incorrect TIN. Hr block com 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. Hr block com Payments outside the United States to U. Hr block com S. Hr block com person. Hr block com   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Hr block com S. Hr block com 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. Hr block com S. Hr block com trade or business. Hr block com Payments to foreign person. Hr block com   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Hr block com U. Hr block com S. Hr block com -source amount. Hr block com   Backup withholding and information reporting are not required for payments of U. Hr block com S. Hr block com -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. Hr block com A U. Hr block com S. Hr block com resident is not a foreign person. Hr block com 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. Hr block com 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. Hr block com S. Hr block com person. Hr block com   For information about the 28% withholding tax that may apply to payments of U. Hr block com S. Hr block com -source OID or interest to foreign persons, see Publication 515. Hr block com Foreign-source amount. Hr block com   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Hr block com 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. Hr block com More information. Hr block com   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Hr block com 6049-5. Hr block com Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Hr block com It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Hr block com 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. Hr block com However, the information provided does not cover every situation. Hr block com More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Hr block com Including OID in income. Hr block com   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Hr block com Exceptions. Hr block com   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Hr block com U. Hr block com S. Hr block com savings bonds. Hr block com Tax-exempt obligations. Hr block com (However, see Tax-Exempt Bonds and Coupons, later. Hr block com ) Obligations issued by individuals before March 2, 1984. Hr block com Loans of $10,000 or less between individuals who are not in the business of lending money. Hr block com (The dollar limit includes outstanding prior loans by the lender to the borrower. Hr block com ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Hr block com   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. Hr block com Publication 550 also discusses rules for holders of REMIC interests and CDOs. Hr block com De minimis rule. Hr block com   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Hr block com 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Hr block com Debt instruments with de minimis OID are not listed in this publication. Hr block com 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. Hr block com Also, the de minimis rules generally do not apply to tax-exempt obligations. Hr block com Example 2. Hr block com 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. Hr block com 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. Hr block com Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Hr block com Example 3. Hr block com Assume the same facts as Example 2, except the debt instrument was issued at $950. Hr block com You must report part of the $50 OID each year because it is more than $25. Hr block com Choice to report all interest as OID. Hr block com   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. Hr block com See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Hr block com   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. Hr block com For more information, see Regulations section 1. Hr block com 1272-3. Hr block com Purchase after date of original issue. Hr block com   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Hr block com If so, the OID reported to you on Form 1099-OID may have to be adjusted. Hr block com For more information, see Showing an OID adjustment under How To Report OID, later. Hr block com The following rules generally do not apply to contingent payment debt instruments. Hr block com Adjustment for premium. Hr block com   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Hr block com Your adjustment is the total OID shown on your Form 1099-OID. Hr block com Adjustment for acquisition premium. Hr block com   If your debt instrument has acquisition premium, reduce the OID you report. Hr block com 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. Hr block com Adjustment for market discount. Hr block com   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Hr block com Your adjustment is the accrued market discount for the year. Hr block com 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. Hr block com If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Hr block com The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Hr block com For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Hr block com 1275-7. Hr block com Sale, exchange, or redemption. Hr block com   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. Hr block com If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Hr block com Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Hr block com   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. Hr block com Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Hr block com 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. Hr block com   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Hr block com Example 4. Hr block com Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Hr block com 00 on November 1 of Year 1. Hr block com The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Hr block com The debt instrument provides for semiannual payments of interest at 10%. Hr block com Assume the debt instrument is a capital asset in Larry's hands. Hr block com The debt instrument has $13,765. Hr block com 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Hr block com 00 issue price). Hr block com Larry sold the debt instrument for $90,000 on November 1 of Year 4. Hr block com Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Hr block com 00 of OID in income and has increased his basis by that amount to $90,791. Hr block com 00. Hr block com Larry has realized a loss of $791. Hr block com 00. Hr block com All of Larry's loss is capital loss. Hr block com 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. Hr block com Form 1099-OID shows all OID income in box 1 except OID on a U. Hr block com S. Hr block com Treasury obligation, which is shown in box 8. Hr block com It also shows, in box 2, any qualified stated interest you must include in income. Hr block com (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Hr block com ) A copy of Form 1099-OID will be sent to the IRS. Hr block com Do not attach your copy to your tax return. Hr block com Keep it for your records. Hr block com 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. Hr block com 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. Hr block com Form 1099-OID not received. Hr block com   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. Hr block com Refiguring OID. Hr block com   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. Hr block com You bought the debt instrument at a premium or at an acquisition premium. Hr block com The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Hr block com S. Hr block com Treasury securities). Hr block com The debt instrument is a contingent payment or inflation-indexed debt instrument. Hr block com See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Hr block com Refiguring interest. Hr block com   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. Hr block com Nominee. Hr block com   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. Hr block com ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Hr block com Show the owner of the debt instrument as the “recipient” and you as the “payer. Hr block com ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Hr block com You must also give a copy of the Form 1099-OID to the actual owner. Hr block com However, you are not required to file a nominee return to show amounts belonging to your spouse. Hr block com See the Form 1099 instructions for more information. Hr block com   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Hr block com 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. Hr block com Form 1040 or Form 1040A required. Hr block com   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Hr block com You received a Form 1099-OID as a nominee for the actual owner. Hr block com Your total interest and OID income for the year was more than $1,500. Hr block com Form 1040 required. Hr block com   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. Hr block com 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. Hr block com Also, you must use Form 1040 if you were charged an early withdrawal penalty. Hr block com Where to report. Hr block com   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. Hr block com Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Hr block com Also include any other OID and interest income for which you did not receive a Form 1099. Hr block com Showing an OID adjustment. Hr block com   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. Hr block com   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. Hr block com If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Hr block com Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Hr block com Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Hr block com Subtract that OID from the subtotal and enter the result on line 2. Hr block com If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Hr block com Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Hr block com Below the subtotal, write “OID Adjustment” and show the additional OID. Hr block com Add that OID to the subtotal and enter the result on line 2. Hr block com 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. Hr block com It also may depend on the type of the debt instrument. Hr block com There are different rules for each of the following debt instruments. Hr block com Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Hr block com Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Hr block com Debt instruments issued after July 1, 1982, and before 1985. Hr block com Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Hr block com Contingent payment debt instruments issued after August 12, 1996. Hr block com Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Hr block com Zero coupon bonds. Hr block com   The rules for figuring OID on zero coupon bonds backed by U. Hr block com S. Hr block com Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Hr block com 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. Hr block com The OID, which is taxed as ordinary income, generally equals the following amount. Hr block com   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. Hr block com If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Hr block com 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. Hr block com For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Hr block com Your basis in the debt instrument is increased by the OID you include in income. Hr block com Form 1099-OID. Hr block com   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Hr block com However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Hr block com See Reduction for acquisition premium, later. Hr block com 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. Hr block com irs. Hr block com gov/pub1212 by clicking the link under Recent Developments. Hr block com Form 1099-OID not received. Hr block com    The OID listed is for each $1,000 of redemption price. Hr block com You must adjust the listed amount if your debt instrument has a different principal amount. Hr block com For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Hr block com   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Hr block com (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. Hr block com ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Hr block com Divide the OID shown by 12. Hr block com 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. Hr block com This is the OID to include in income unless you paid an acquisition premium. Hr block com The reduction for acquisition premium is discussed next. Hr block com Reduction for acquisition premium. Hr block com   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Hr block com 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. Hr block com This is the monthly OID. Hr block com Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Hr block com (If the result is zero or less, stop here. Hr block com You did not pay an acquisition premium. Hr block com ) 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. Hr block com Subtract the amount figured in (3) from the amount figured in (1). Hr block com This is the OID to include in income for each month you hold the debt instrument during the year. Hr block com Transfers during the month. Hr block com   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. Hr block com Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Hr block com 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. Hr block com For information about showing the correct OID on your tax return, see How To Report OID, earlier. Hr block com Form 1099-OID. Hr block com   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Hr block com However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Hr block com See Constant yield method and the discussions on acquisition premium that follow, later. Hr block com 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. Hr block com irs. Hr block com gov/pub1212 by clicking the link under Recent Developments. Hr block com Form 1099-OID not received. Hr block com    The OID listed is for each $1,000 of redemption price. Hr block com You must adjust the listed amount if your debt instrument has a different principal amount. Hr block com For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Hr block com   If you held the debt instrument the entire year, use the OID shown in Section I-A. Hr block com (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. Hr block com ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Hr block com Method 1. Hr block com    Divide the total OID for a calendar year by 365 (366 for leap years). Hr block com Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Hr block com  This computation is an approximation and may result in a slightly higher OID than Method 2. Hr block com Method 2. Hr block com    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Hr block com (See Accrual period under Constant yield method, next. Hr block com ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Hr block com If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Hr block com Add the results of (2) and (3). Hr block com This is the OID to include in income, unless you paid an acquisition premium. Hr block com (The reduction for acquisition premium is discussed later. Hr block com ) Constant yield method. Hr block com   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Hr block com OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Hr block com   Figure the OID allocable to any accrual period as follows. Hr block com Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Hr block com Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Hr block com Accrual period. Hr block com   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. Hr block com Your tax year will usually include parts of two accrual periods. Hr block com Daily OID. Hr block com   The OID for any accrual period is allocated equally to each day in the accrual period. Hr block com You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Hr block com If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Hr block com Figuring daily OID. Hr block com   The daily OID for the initial accrual period is figured using the following formula. Hr block com   (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. Hr block com Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Hr block com   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. Hr block com 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. Hr block com Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Hr block com   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. Hr block com However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Hr block com To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Hr block com The numerator is the acquisition premium. Hr block com The denominator is the total OID remaining for the debt instrument after your purchase date. Hr block com Section I-A is available at www. Hr block com irs. Hr block com gov/pub1212 and clicking the link under Recent Developments. Hr block com Using Section I-A to figure accumulated OID. Hr block com   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. Hr block com The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Hr block com The OID from January 1 of a calendar year to the date of purchase, figured as follows. Hr block com 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. Hr block com 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. Hr block com Add the amounts figured in (2a) and (2b). Hr block com 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. Hr block com You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Hr block com Your basis in the debt instrument is increased by the OID you include in income. Hr block com For information about showing the correct OID on your tax return, see How To Report OID, earlier. Hr block com Form 1099-OID. Hr block com   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Hr block com However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Hr block com See Constant yield method and Reduction for acquisition premium, later. Hr block com   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. Hr block com See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Hr block com 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. Hr block com irs. Hr block com gov/pub1212 by clicking the link under Recent Developments. Hr block com Form 1099-OID not received. Hr block com   The OID listed is for each $1,000 of redemption price. Hr block com You must adjust the listed amount if your debt instrument has a different principal amount. Hr block com For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Hr block com   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Hr block com (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. Hr block com ) If you did not hold the debt instrument the entire year, figure your OID as follows. Hr block com Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Hr block com (See Accrual period under Constant yield method, later. Hr block com ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Hr block com Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Hr block com Add the results of (2) and (3). Hr block com This is the OID to include in income for that year, unless you paid an acquisition premium. Hr block com (The reduction for acquisition premium is discussed later. Hr block com ) Tax-exempt bond. Hr block com   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. Hr block com You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Hr block com In general, use the rules that follow to determine your OID. Hr block com Constant yield method. Hr block com   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Hr block com (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Hr block com ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Hr block com   Figure the OID allocable to any accrual period as follows. Hr block com Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Hr block com The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Hr block com The yield must be stated appropriately taking into account the length of the particular accrual period. Hr block com Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Hr block com Accrual period. Hr block com   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. Hr block com For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Hr block com Any short period is included as the first accrual period. Hr block com   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. Hr block com However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Hr block com Daily OID. Hr block com   The OID for any accrual period is allocated equally to each day in the accrual period. Hr block com Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Hr block com 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. Hr block com 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. Hr block com Figuring daily OID. Hr block com   The daily OID for the initial accrual period is figured using the following formula. Hr block com   (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. Hr block com Example 5. Hr block com On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Hr block com 17. Hr block com According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Hr block com The yield to maturity is 12%, compounded semiannually. Hr block com The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Hr block com The accrual periods are the 6-month periods ending on each of these dates. Hr block com The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Hr block com The daily OID for the first accrual period is figured as follows. Hr block com   ($86,235. Hr block com 17 x . Hr block com 12/2) – $5,000     181 days     = $174. Hr block com 11020 = $. Hr block com 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. Hr block com 17 + $174. Hr block com 11), or $86,409. Hr block com 28. Hr block com The number of days for the second accrual period (July 1 through December 31) is 184 days. Hr block com The daily OID for the second accrual period is figured as follows. Hr block com   ($86,409. Hr block com 28 x . Hr block com 12/2) – $5,000     184 days     = $184. Hr block com 55681 = $1. Hr block com 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, $174. Hr block com 11 ($. Hr block com 95665 × 182 days) plus $184. Hr block com 56 ($1. Hr block com 00303 × 184 days), or $358. Hr block com 67. Hr block com Add the OID to the $10,000 interest you report on your income tax return for Year 1. Hr block com Example 6. Hr block com 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. Hr block com Also, the interest payment dates are October 31 and April 30 of each calendar year. Hr block com The accrual periods are the 6-month periods ending on each of these dates. Hr block com The number of days for the first accrual period (May 1 through October 31) is 184 days. Hr block com The daily OID for the first accrual period is figured as follows. Hr block com   ($86,235. Hr block com 17 x . Hr block com 12/2) – $5,000     184 days     = $174. Hr block com 11020 = $. Hr block com 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Hr block com The daily OID for the second accrual period is figured as follows. Hr block com   ($86,409. Hr block com 28 x . Hr block com 12/2) – $5,000     181 days     = $184. Hr block com 55681 = $1. Hr block com 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Hr block com 31 of OID in income. Hr block com This is $174. Hr block com 11 ($. Hr block com 94625 × 184 days) for the period May 1 through October 31 plus $62. Hr block com 20 ($1. Hr block com 01965 × 61 days) for the period November 1 through December 31. Hr block com The OID is added to the $5,000 interest income paid on October 31 of Year 1. Hr block com Your basis in the debt instrument is increased by the OID you include in income. Hr block com On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Hr block com 48 ($86,235. Hr block com 17 + $236. Hr block com 31). Hr block com Short first accrual period. Hr block com   You may have to make adjustments if a debt instrument has a short first accrual period. Hr block com 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. Hr block com (The remaining accrual periods begin on May 1 and November 1. Hr block com ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Hr block com You may use any reasonable compounding method in determining OID for a short period. Hr block com Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Hr block com Consult your tax advisor for more information about making this computation. Hr block com   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. Hr block com Reduction for acquisition premium. Hr block com   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. Hr block com To figure the daily acquisition premium, multiply the daily OID by the following fraction. Hr block com The numerator is the acquisition premium. Hr block com The denominator is the total OID remaining for the debt instrument after your purchase date. Hr block com Example 7. Hr block com 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. Hr block com The adjusted issue price on November 1 of Year 1 is $86,409. Hr block com 28 ($86,235. Hr block com 17 + $174. Hr block com 11). Hr block com In this case, you paid an acquisition premium of $590. Hr block com 72 ($87,000 − $86,409. Hr block com 28). Hr block com The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Hr block com 1) Daily OID on date of purchase (2nd accrual period) $1. Hr block com 01965*  2)  Acquisition premium $590. Hr block com 72    3)  Total OID remaining after purchase date ($13,764. Hr block com 83 − $174. Hr block com 11) 13,590. Hr block com 72   4) Line 2 ÷ line 3 . Hr block com 04346  5)  Line 1 × line 4 . Hr block com 04432  6)  Daily OID reduced for the acquisition premium. Hr block com Line 1 − line 5 $0. Hr block com 97533  * As shown in Example 6. Hr block com The total OID to include in income for Year 1 is $59. Hr block com 50 ($. Hr block com 97533 × 61 days). Hr block com 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. Hr block com In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Hr block com If you hold a contingent payment bond, you must report OID as it accrues each year. Hr block com 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. Hr block com To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Hr block com Noncontingent bond method. Hr block com    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. Hr block com In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Hr block com When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Hr block com If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Hr block com If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Hr block com Form 1099-OID. Hr block com   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. Hr block com For example, the amount may not be correct if the contingent payment was different from the projected amount. Hr block com If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Hr block com For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Hr block com Figuring OID. Hr block com   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Hr block com The issuer must make these available to you. Hr block com Comparable yield. Hr block com   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. Hr block com The comparable yield is determined as of the debt instrument's issue date. Hr block com Projected payment schedule. Hr block com   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. Hr block com The projected payment schedule is created by the issuer as of the debt instrument's issue date. Hr block com It is used to determine the issuer's and holder's interest accruals and adjustments. Hr block com Steps for figuring OID. Hr block com   Figure the OID on a contingent payment debt instrument in two steps. Hr block com Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Hr block com Use the comparable yield as the yield to maturity. Hr block com 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). Hr block com Do not treat any amount payable as qualified stated interest. Hr block com Adjust the OID in (1) to account for actual contingent payments. Hr block com If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Hr block com If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Hr block com Net positive adjustment. Hr block com   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. Hr block com Treat a net positive adjustment as additional OID for the tax year. Hr block com Net negative adjustment. Hr block com   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. Hr block com Use a net negative adjustment to offset OID on the debt instrument for the tax year. Hr block com 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. Hr block com 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. Hr block com 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. Hr block com Basis adjustments. Hr block com   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Hr block com Your basis, however, is not affected by any negative or positive adjustments. Hr block com Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Hr block com Treatment of gain or loss on sale or exchange. Hr block com   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. Hr block com 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. Hr block com If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Hr block com See Regulations section 1. Hr block com 1275-4 for exceptions to these rules. Hr block com Premium, acquisition premium, and market discount. Hr block com   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Hr block com See Regulations section 1. Hr block com 1275-4 to determine how to account for these items. Hr block com Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Hr block com An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d