Form 1099-OID is used to report original issue discount (OID) and certain other item related to debt instruments that were sold at a discount to investor/taxpayers. Original Issue Discount (OID) is the difference between the face amount of a debt instrument (typically a bond) and the price that an investor paid for the debt instrument or bond at the time it was issued. However, when the bond is eventually redeemed on its maturity date, the face amount of the bond is actually paid to the investor. Box 1 contains the Original Discount Amount (OID) and it is considered to be taxable interest. This Original Issue Discount (OID) amount is reported by the investor/taxpayer as part of their taxable income as the original issue discount amount accrues over the life of the underlying bond, irrespective of the receipt of any payments from the issuer during that time. The amount reported in Box 1 is the amount of the OID that is allocated to the current tax year and is reported as taxable interest on the tax return.
Box 2 contains Other Periodic Interest which is the actual interest that is paid on these debt instruments (or bonds) during the year. The investor/taxpayer also pays taxes on any actual interest income received that is separate from the original discount amount. If the taxpayer held the obligation the entire year, they will also report any amount in Box 2 as interest income on their tax return. However, if the taxpayer disposed of the bond or acquired it from another holder during the year, see Publication 550 – Investment Income and Expenses for reporting instructions. If there is an amount in both boxes 2 and 8, the amount in box 2 is interest on a U.S. Treasury obligation and it is exempt from state and local income taxes.
Box 3 contains the Early Withdrawal Penalty which represents any interest or principal forfeited when the investor/taxpayer surrendered the investment (withdrew the money) before the maturity date of the obligation. The investor/taxpayer may deduct this amount from their income to determine their adjusted gross income on the tax return.
Box 4 contains the Federal Tax Withholdings including any backup withholdings that were withheld out of the interest paid on the investment.
Box 5 contains (for covered securities) the Market Discount amount that accrued on the debt instrument during the year. This occurs when the taxpayer notifies the payer that they made an election to include the market discount in their income as it accrues. If an amount is reported in Box 5, the treatment given to the market discount depends on whether it a taxable security or a tax-exempt security. If the underlying security pays taxable interest, this amount is added to the Interest received and should be combined with any Interest amount contained in Box 1 or if the security is a treasury bond, this amount combined with any Interest amount contained in Box 8. If the underlying security pays tax-exempt interest, this amount is to be added to the tax-exempt Interest received and should be combined with any tax-exempt Interest amount contained in Box 11. Generally a bond that is acquired at original issue at less than face value of the bond is subject to market discount and it is the amount of the stated redemption price of a bond at maturity that is more than the basis in the bond at the time it is acquired.
Box 6 contains for a covered taxable security, the amount of Acquisition Premium amortization for the year. This amount should be used to reduce the amount Original Discount Amount (OID) that is considered to be taxable interest (the amount in Box 1). If an amount is reported in this Box 6, the taxpayer will make a separate “OID Adjustment” on Schedule B (Form 1040) to reduce the taxable interest. If no amount is entered in this Box 6, either no acquisition premium was incurred by the taxpayer or the payer of the debt instrument may have reported a net amount in Box 1 and no further enter for premium amortization is made.
Box 7 shows a description of the debt instrument and may include information such as the identification (CUSIP) number, the interest or coupon rate, issuer and year of maturity.
Box 8 shows the Original Issue Discount (OID) amount on a U.S. Treasury obligation for portion of the tax year that the taxpayer owned the Treasury obligation. This OID amount is not included in Box 1 on the 1099-OID. This amount should be reported on the federal return as interest income but it is considered exempt from taxation for state and local income tax purposes. If in the highly unusual situation this amount is negative, it represents a deflationary adjustment to a Treasury obligation that is indexed to inflationary determined rates. To report the OID amount in Box 8, the amount should be added to the amount in Box 1 as taxable interest, then the amount in Box 8 should also be entered as State Exempt Interest.
Box 9 contains information on the taxpayer’s share of any Investment Expenses. These expenses may be deducted as an itemized deduction on Schedule A (Form 1040) as a Miscellaneous Deduction – Other Expense, subject to the 2% adjusted gross income limitation.
Box 10 contains the Bond Premium amortization allocable to interest payments. This amount is considered the Amortized Bond Premium on the covered security for the current year. This amount is to be subtractedfrom the reported interest amount on Schedule B (Form 1040) as a separate “ABP Adjustment.” For taxable securities, if no amount is reported in this box for a security that was acquired at a premium, the payer may have reported a net amount in Box 2.
Box 11 contains the Tax-exempt obligation or debt instrument Original Issue Discount amount. Generally this is reported as tax-exempt interest on the tax return on Form 1040, Line 8b. However, in certain cases a portion of this amount may be considered taxable. See: Publication 1212 – Guide to Original Issue Discount (OID) Instruments.
Box 12 – 14 contains the State Withholding Information related to the bond or other debt investment. These amounts should be entered in Keystone Tax Solutions Pro from the Main Menu of the Tax Return (Form 1040) by selecting Payments, Estimates, & EIC > Other Federal Withholdings (Form 1099).
To input the amounts from Box 1-10 in Keystone Tax Solutions Pro, from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Interest or Dividends (Sch B, 8815) (NOTE: If you have an amount on ‘Interest or Dividends less than $1500’, you will not be able to enter an amount on this line. In this case, transfer the items from ‘less than $1500’ to ‘Sch B, 8815’),
- Select New, Regular Interest
- Enter the Payer’s Name
- Enter all interest listed in Box 1 of Form 1099-OID (and any amount contained in Box 2 if the taxpayer held the obligation the entire year)
- Select ‘OK’ This will bring you to the Schedule B – Transaction Edit Menu.
- Enter the amounts from Boxes 3 through 10 as described above in the appropriate field.
To input the amounts from Box 11 in Keystone Tax Solutions Pro, from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Interest or Dividends (Sch B, 8815) (NOTE: If you have an amount on ‘Interest or Dividends less than $1500’, you will not be able to enter an amount on this line. In this case, transfer the items from ‘less than $1500’ to ‘Sch B, 8815’),
- Select New, Tax Exempt Interest
- Enter the Payer’s Name
- Enter the tax exempt interest listed in Box 11 of Form 1099-OID
- Select ‘OK’ This will bring you to the Schedule B – Transaction Edit Menu.
- Select ‘OK’ to complete the entry
NOTE: This is a guide on entering Form 1099-OID into the tax program. This is not intended as tax advice. For additional information refer to the Additional Resources below.
Additional Resources:
Instructions for Forms 1099-INT and 1099-OID – Interest Income and Original Issue Discount
Publication 1212 – Guide to Original Issue Discount (OID) Instruments