How to Report Accrued Interest Paid on Form 1040: Schedule B and Basis

To report accrued interest paid on Form 1040, list the full interest amount from your Form 1099-INT on Schedule B, Part I, subtotal it, then subtract the accrued interest you paid to the seller on a separate line labeled “Accrued Interest.” The net figure flows to line 2b of Form 1040 or Form 1040-SR, so you’re taxed only on the interest you actually earned after buying the bond.

Why the Subtraction Exists

When you buy a bond between interest payment dates, part of your purchase price reimburses the seller for interest that accrued before you owned the bond. On the next payment date, the issuer pays the full period’s interest to you, and your broker reports that full amount on Form 1099-INT. The IRS treats the accrued portion as taxable to the seller, not to you.¹ Without the Schedule B adjustment, you’d pay tax on a return of your own cash.

Documents You Need Before You File

You need two records to make the adjustment correctly.

The first is your Form 1099-INT. The broker reports the full interest payment, including the accrued portion, in Box 1 for taxable bonds or Box 8 for tax-exempt bonds.² The 1099-INT does not break out the accrued interest in a separate box, so you cannot get the subtraction amount from it.

The second is the trade confirmation or settlement statement from your bond purchase. This shows the exact dollar amount of accrued interest you paid to the seller at settlement, and it is the only record that proves how much of the reported interest was your own money coming back to you.¹

Step by Step on Schedule B

For taxable bonds, work through Schedule B, Part I in this order:

On line 1, enter the name of each payer and the full interest amount shown in Box 1 of your 1099-INT. Include the accrued portion you paid at purchase.
Below your last entry on line 1, total the amounts and write a subtotal.
On the next line, write “Accrued Interest” in the description column and enter the amount you paid to the seller as a subtraction.
Subtract the accrued interest from the subtotal, and enter the result on line 2 of Schedule B.

The “Accrued Interest” label matters. It explains why the interest on your return is lower than the amount your broker reported, and it prevents an automated mismatch notice from the IRS.³

Carrying the Net to Form 1040

The net figure from Schedule B, line 4 (line 2 minus line 3) goes on line 2b of Form 1040 or Form 1040-SR.⁴ That amount feeds your adjusted gross income. If you skip the Schedule B subtraction, the full gross interest lands on line 2b and you pay tax at your marginal rate on money that was never income.

Multiple Bond Purchases in One Year

If you bought several bonds between interest dates during the year, you don’t need a separate subtraction line for each one. Schedule B lets you combine amounts into a single “Accrued Interest” line below the subtotal, provided the total is clear.³ Listing each bond separately is also fine. Either way, the total subtraction should match your trade confirmations.

Tax-Exempt and Municipal Bonds

Tax-exempt interest follows a different path. Your broker reports it in Box 8 of Form 1099-INT, and you enter the total on line 2a of Form 1040 or Form 1040-SR rather than on Schedule B, Part I.²³

The federal tax stakes are lower because the interest itself is exempt, but the accrued portion still affects the amount reported on line 2a, and some states tax municipal bond interest from other states. If you bought a tax-exempt bond between interest dates, reduce the amount on line 2a by the accrued interest you paid, and keep the trade confirmation.

OID Bonds

If you bought a bond issued at an original issue discount and need to reduce the OID income reported to you, the subtraction uses the same Schedule B mechanics, but you label it “OID Adjustment” instead of “Accrued Interest.”³ One boundary: if your broker already reduced the OID on your 1099-OID for an acquisition premium, you cannot take a further Schedule B adjustment for that bond.

Effect on Your Bond’s Cost Basis

The accrued interest you paid is not part of your bond’s cost basis. When the issuer sends the first full interest payment, the accrued portion is treated as a return of capital, and you reduce your basis in the bond by that amount.¹

Say you paid $10,200 at settlement: $10,000 for the bond and $200 in accrued interest. Your basis is $10,000. If you later sell for $10,300, your capital gain is $300, not $100. Rolling the accrued interest into basis would understate the gain or overstate a loss when you sell.

Records and Penalty Risk

Federal law requires you to keep records that support the items on your return.⁵ For this adjustment, hold onto the trade confirmation or settlement statement, the Form 1099-INT, and any Form 1099-OID. The general retention window is three years from the date you filed the return, or two years from the date you paid the tax, whichever is later.⁶

Documentation matters because if the IRS disallows the subtraction, the interest you took off becomes taxable, and a 20% accuracy-related penalty can apply on the underpayment if the agency finds negligence or a substantial understatement.⁷ A substantial understatement generally means tax understated by more than 10% of the correct tax or $5,000, whichever is greater. The trade confirmation is what proves the accrued interest amount, so keep it with your tax file for the bond’s entire holding period.

1
Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
2
Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID (01/2024)
3
Internal Revenue Service. Instructions for Schedule B (Form 1040) (2025)
4
Internal Revenue Service. Line-by-Line Instructions Free File Fillable Forms
5
Office of the Law Revision Counsel. 26 USC 6001 – Records and Special Returns
6
Internal Revenue Service. Topic No. 305, Recordkeeping
7
Internal Revenue Service. Accuracy-Related Penalty