How to Report Accrued Interest Paid on Late-Year Bond Purchase: Which Tax Year for Schedule B?

The correct approach is to report the accrued interest reduction in the same tax year that you receive and report the interest payment - so in your case, that would be 2025. The IRS treats accrued interest as an adjustment to your overall interest income, not as a separate deduction. Since you won't be reporting any interest income from this bond on your 2024 return (because you haven't received any payments yet), there's nothing to adjust. When you receive your first interest payment in March 2025, that's when you'll report both the income and subtract the accrued interest you paid at purchase. This makes sense from an accounting perspective because the accrued interest you paid was essentially returning interest that had accrued to the previous bondholder before you purchased it. You're paying them for interest they earned, then getting that same amount back as part of your first payment.

I went through this exact same headache last year with some corporate bonds I bought in December, and it was really confusing! I ended up using https://taxr.ai to analyze my brokerage statements and tax documents. Their system automatically identified the accrued interest situation and provided clear guidance. The tool explained that the accrued interest paid should be reported as a negative amount on Schedule B in the same tax year as when you receive the corresponding interest payment. So for your situation, you'd subtract that $125 on your 2025 return, not 2024. Their explanation matched what the previous commenter said, but having it directly applied to my actual documents made it so much clearer.

Just wanted to follow up and say I tried the taxr.ai service that was mentioned, and it was super helpful for my bond situation! I uploaded my Treasury bond statements and it clearly identified where I had paid accrued interest on purchases that spanned tax years. The system confirmed what others here have said - that I should report the reduction in the year I receive the interest payment, not when I paid the accrued interest. It even provided IRS publication references that I could show my accountant, who was insisting I should deduct it in the year I paid it. Turns out I've been doing it wrong for years! Glad I found this thread and the recommendation.

If you're still having trouble getting through to the IRS to confirm this (I know their phone lines are a nightmare), I used https://claimyr.com to get through to an actual IRS agent about a similar bond tax question. You can see how it works here: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you back when an agent is about to answer. I was skeptical, but after spending literally hours on hold previously, this was a game-changer. The IRS agent I spoke with confirmed exactly what others have said here - you report the accrued interest adjustment in the same tax year as when you receive and report the interest payment (2025 in your case).

Well I feel like an idiot now. I actually tried that Claimyr service after posting my skeptical comment, and it worked exactly as described. Got connected to an IRS agent in about an hour (without having to actually sit on hold), and they confirmed the bond interest question too. They explained that the accrued interest is a tax basis adjustment that offsets the interest you receive later, so it absolutely has to be reported in the same tax year as the interest payment. The agent was super clear that attempting to deduct it in the year of purchase (before receiving any interest) would be incorrect and could trigger an audit flag. Definitely won't be spending hours on hold with the IRS again!

Just want to add that this situation is covered in IRS Publication 550 under "Bond Premium Amortization." The accrued interest paid at purchase is slightly different than premium, but the reporting concept is similar - you adjust your reportable interest income in the year you receive the interest payment. One important note: make sure your broker issues the correct 1099-INT in 2025. Sometimes they report the full interest payment without accounting for the accrued interest you paid. If that happens, you'll need to make an adjustment on your Schedule B to avoid being taxed on money that's really just a return of your own capital.

Has anyone used TurboTax for reporting this scenario? I'm in exactly the same situation (paid accrued interest in 2024, won't get payment until 2025), and I'm wondering if the software handles this correctly or if I need to do some manual adjustments.

I had a very similar situation last year with municipal bonds purchased in December 2023. What really helped me was creating a simple spreadsheet to track all my bond purchases with accrued interest, including the purchase date, accrued interest paid, and expected first payment date. The key thing I learned is that the IRS views accrued interest as a "return of capital" rather than a deduction. You're essentially getting back money you paid to the previous bondholder for interest they earned but hadn't collected yet. This is why it must be reported in the same year you receive the actual interest payment - because that's when you're reporting the income that needs to be adjusted. For your March 2025 payment, you'll report $750 as interest income and then subtract the $125 accrued interest as a negative adjustment on Schedule B. Make sure to keep your purchase confirmation showing the accrued interest amount - the IRS may ask for documentation if they have questions about the adjustment.

I've been dealing with a similar situation with TIPS (Treasury Inflation-Protected Securities) that I bought in late 2024. The accrued interest timing issue becomes even more complex with TIPS because of the inflation adjustments, but the basic principle is the same. One thing I learned from my tax preparer is to keep detailed records not just of the accrued interest amount, but also the exact settlement date and the interest payment schedule. This helps if you ever need to explain the timing to the IRS. She also mentioned that if you have multiple bonds with different accrued interest amounts, you should list each one separately on Schedule B rather than lumping them together - it makes the return clearer and less likely to trigger questions. For anyone using tax software, I found that H&R Block's premium version handles this better than TurboTax. It has a specific section for bond accrued interest adjustments that walks you through the process step by step. But honestly, after reading all these responses, it sounds like manually tracking everything in a spreadsheet and then entering the adjustments yourself is the most reliable approach regardless of which software you use.