If you have invested in certain types of debt instruments, you might come across something called Original Issue Discount (OID). The IRS uses Form 1099-OID for the sole purpose of tracking this type of income. So let’s break it down: what is OID, what does Form 1099-OID have to do with this, and how do you report it as income on your tax return?.
What is original issue discount (OID)?
Original Issue Discount (OID) is the difference between a debt instrument’s face value (what you will get at maturity) and original issue price. It is a form of interest accumulated over the life of the instrument. If you purchase a bond for $900 that has a maturity value of $1,000, the $100 difference is OID. The $100 is taxed as interest income throughout the bond’s term.
When do you receive Form 1099-OID?
Here are some reasons you may receive this form:
- The OID includible in your gross income is at least $10.
- They withheld and paid any foreign tax on your OID.
- They withheld (and did not refund) any federal income tax under backup withholding rules, even if the OID amount is less than $10.
You’ll typically receive this form by January 31 of the year following the tax year in question.
How to read Form 1099-OID
It gives you information for reporting income properly on Form 1099-OID:
- Box 1: Shows the OID amount that you will have to include in your gross income.
- Box 2: Reports any other periodic interest which you received from the debt instrument.
- Box 4: Indicates federal income tax withheld under backup withholding rules.
- Box 11: Shows any tax-exempt OID that may apply for certain municipal bonds.
So make sure you carefully review each box before reporting amounts on your tax return.
How to report OID income on your tax return
Reporting OID income involves a few steps:
- Form 1040: Enter the OID amount from Box 1 of Form 1099-OID as interest income on your Form 1040.
- Schedule B: If your total interest income exceeds $1,500, you’ll need to complete Schedule B, listing each payer and the amount received.
- Adjustments: If you acquired the debt instrument at a premium or market discount, you might need to adjust the OID amount. Refer to IRS Publication 1212 for detailed guidance on these adjustments.
Exceptions and special cases
Not all debt instruments with OID require reporting:
- U.S. Savings Bonds: OID rules generally do not apply.
- Tax-Exempt Obligations: Interest from these is typically not taxable.
- Short-Term Obligations: Debt instruments with a fixed maturity date of one year or less are usually exempt from OID reporting.
Always verify whether your specific investment falls under these exceptions.
What if you don’t receive Form 1099-OID?
If you believe you should have received Form 1099-OID but didn’t, it’s essential to:
- Contact the issuer: Reach out to the financial institution to request the form.
- Report the income: Even without the form, you’re responsible for reporting all taxable OID income on your tax return.
Keeping thorough records of your investments will aid in accurate reporting.
Potential penalties for non-compliance
If you fail to report your OID, it may lead to:
- Penalties: The IRS may impose fines for underreporting income.
- Interest charges: You’ll owe interest on any unpaid tax resulting from unreported OID income.
- Audits: Consistent non-compliance can increase the likelihood of an IRS audit.
To avoid these issues, ensure all OID income is accurately reported.
