If your bonds or certificates of deposit (CDs) have reached maturity, you'll need to file tax Form 1099-OID.
Form 1099-OID is used to report a special type of interest from certain bonds that were issued at a price less than the value you can redeem them for once the bond matures. Here's what you need to know about this type of interest and tax form.
Form 1099-OID, Original Issue Discount, exists to report income when bonds, notes, or certificates of deposit (CDs) are sold at a discount from their maturity value. For example, a bond with a $1,000 face value may be sold for $900. When the bond matures, the bondholder will receive the full $1,000 despite only paying $900 for it. The taxpayer captures the discount as income over the life of the instrument rather than waiting until it is sold.
Who files Form 1099-OID?
Usually, this form is sent by a brokerage company that holds the debt instruments for investors that have OID. As an investor, you don't have to issue this tax form unless you pay OID to someone else. If you have an investment with an OID, you need to look out for this form in your mailbox at the beginning of each year so that you can include the relevant information on your tax return.
A Form 1099-OID must be issued by anyone in any of the below three cases:
- When they pay at least $10 of reportable OID to someone
- When they withheld and paid any foreign tax on OID for someone
- When they withheld and didn't refund federal income tax from someone under the backup withholding rules
Backup withholding for an OID should take place in the following situations:
- The payee doesn't provide an Individual Taxpayer Identification Number (ITIN)
- The IRS tells you the payee's ITIN isn't correct
- The IRS tells you the payee is subject to backup withholding because the payee underreported
- For debt instruments acquired after 1983 where the payee doesn't certify they aren't subject to backup withholding or that their ITIN is correct
How this form works with your taxes
Form 1099-OID has a lot of information on it. When you receive this form, you'll need to include this information in your tax return. The easiest way to do this is to use tax software, such as TurboTax. Once you input the information from the form into the software, TurboTax will make any necessary calculations before placing the information in the right place on the correct tax form.
As with most informational forms, this form includes the payer's and recipient's basic identifying information. It also has 14 numbered boxes that contain essential information you may need. While all boxes on this form are important if they have numbers reported in them, here are the most common ones you may encounter and how they work.
- Box 1 - Original issue discount for the year: This is taxable interest you need to report on your tax return even though you didn't receive a payment for it. This flows through to the taxable interest line on your tax return.
- Box 2 - Other periodic interest: This is taxable interest you were actually paid during the year. This flows through to the taxable interest line on your tax return.
- Box 3 - Early withdrawal penalty: This is the penalty you pay for withdrawing money from the investment early and can be deducted from income. This flows through to the penalty on early withdrawal of savings line on Schedule 1 of your tax return.
- Box 4 - Federal income tax withheld: This is the amount of federal income tax that was withheld from your payments. This flows through to the federal income tax withheld from 1099s line on your tax return.
- Box 7 - Description: This provides information about the investment. It is helpful to know but won't show up on your tax return.
- Box 8 - Original issue discount on U.S. Treasury obligations: This represents taxable interest on the federal income tax level but is typically tax-exempt interest for state and local income taxes. This flows through to the taxable interest line on your federal tax return.
You don't need to include the form with your tax return if you are paper-filing your return. No matter how you file your taxes, you should keep all tax documents, including Form 1099-OID, for future reference.
Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we've got you covered. Feel confident doing your own taxes.