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1040ez Instruction

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1040ez Instruction

1040ez instruction 13. 1040ez instruction   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. 1040ez instruction It is divided into the following sections. 1040ez instruction Cost basis. 1040ez instruction Adjusted basis. 1040ez instruction Basis other than cost. 1040ez instruction Your basis is the amount of your investment in property for tax purposes. 1040ez instruction Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. 1040ez instruction Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. 1040ez instruction If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 1040ez instruction Only the basis allocated to the business or investment use of the property can be depreciated. 1040ez instruction Your original basis in property is adjusted (increased or decreased) by certain events. 1040ez instruction For example, if you make improvements to the property, increase your basis. 1040ez instruction If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. 1040ez instruction Keep accurate records of all items that affect the basis of your property. 1040ez instruction For more information on keeping records, see chapter 1. 1040ez instruction Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. 1040ez instruction The cost is the amount you pay in cash, debt obligations, other property, or services. 1040ez instruction Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). 1040ez instruction In addition, the basis of real estate and business assets may include other items. 1040ez instruction Loans with low or no interest. 1040ez instruction    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. 1040ez instruction You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040ez instruction   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 1040ez instruction Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 1040ez instruction If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 1040ez instruction Lump sum purchase. 1040ez instruction   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. 1040ez instruction Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. 1040ez instruction Figure the basis of each asset by multiplying the lump sum by a fraction. 1040ez instruction The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040ez instruction    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. 1040ez instruction Fair market value (FMV). 1040ez instruction   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. 1040ez instruction Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. 1040ez instruction Assumption of mortgage. 1040ez instruction   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 1040ez instruction Settlement costs. 1040ez instruction   Your basis includes the settlement fees and closing costs you paid for buying the property. 1040ez instruction (A fee for buying property is a cost that must be paid even if you buy the property for cash. 1040ez instruction ) Do not include fees and costs for getting a loan on the property in your basis. 1040ez instruction   The following are some of the settlement fees or closing costs you can include in the basis of your property. 1040ez instruction Abstract fees (abstract of title fees). 1040ez instruction Charges for installing utility services. 1040ez instruction Legal fees (including fees for the title search and preparation of the sales contract and deed). 1040ez instruction Recording fees. 1040ez instruction Survey fees. 1040ez instruction Transfer taxes. 1040ez instruction Owner's title insurance. 1040ez instruction Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040ez instruction   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040ez instruction   The following are some of the settlement fees and closing costs you cannot include in the basis of property. 1040ez instruction Casualty insurance premiums. 1040ez instruction Rent for occupancy of the property before closing. 1040ez instruction Charges for utilities or other services related to occupancy of the property before closing. 1040ez instruction Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. 1040ez instruction Fees for refinancing a mortgage. 1040ez instruction Real estate taxes. 1040ez instruction   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040ez instruction You cannot deduct them as an expense. 1040ez instruction    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 1040ez instruction Do not include that amount in the basis of your property. 1040ez instruction If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040ez instruction Points. 1040ez instruction   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 1040ez instruction Generally, you deduct the points over the term of the loan. 1040ez instruction For more information on how to deduct points, see chapter 23. 1040ez instruction Points on home mortgage. 1040ez instruction   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. 1040ez instruction If certain requirements are met, you can deduct the points in full for the year in which they are paid. 1040ez instruction Reduce the basis of your home by any seller-paid points. 1040ez instruction Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. 1040ez instruction The result is the adjusted basis. 1040ez instruction Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040ez instruction Examples of items that increase basis are shown in Table 13-1. 1040ez instruction These include the items discussed below. 1040ez instruction Improvements. 1040ez instruction   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. 1040ez instruction For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. 1040ez instruction Assessments for local improvements. 1040ez instruction   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. 1040ez instruction Do not deduct them as taxes. 1040ez instruction However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. 1040ez instruction Example. 1040ez instruction Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. 1040ez instruction Add the assessment to your property's basis. 1040ez instruction In this example, the assessment is a depreciable asset. 1040ez instruction Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. 1040ez instruction Examples of items that decrease basis are shown in Table 13-1. 1040ez instruction These include the items discussed below. 1040ez instruction Table 13-1. 1040ez instruction Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. 1040ez instruction   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. 1040ez instruction    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. 1040ez instruction   For more information on casualty and theft losses, see chapter 25. 1040ez instruction Depreciation and section 179 deduction. 1040ez instruction   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. 1040ez instruction   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. 1040ez instruction Example. 1040ez instruction You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. 1040ez instruction You added an improvement to the duplex that cost $10,000. 1040ez instruction In February last year, the duplex was damaged by fire. 1040ez instruction Up to that time, you had been allowed depreciation of $23,000. 1040ez instruction You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. 1040ez instruction You deducted a casualty loss of $1,000 on your income tax return for last year. 1040ez instruction You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. 1040ez instruction You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. 1040ez instruction Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. 1040ez instruction Your basis in the land is its original cost of $5,000. 1040ez instruction Easements. 1040ez instruction   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. 1040ez instruction It reduces the basis of the affected part of the property. 1040ez instruction If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040ez instruction   If the gain is on a capital asset, see chapter 16 for information about how to report it. 1040ez instruction If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. 1040ez instruction Exclusion of subsidies for energy conservation measures. 1040ez instruction   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 1040ez instruction Reduce the basis of the property for which you received the subsidy by the excluded amount. 1040ez instruction For more information about this subsidy, see chapter 12. 1040ez instruction Postponed gain from sale of home. 1040ez instruction    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. 1040ez instruction For more information on the rules for the sale of a home, see chapter 15. 1040ez instruction Basis Other Than Cost There are many times when you cannot use cost as basis. 1040ez instruction In these cases, the fair market value or the adjusted basis of the property can be used. 1040ez instruction Fair market value (FMV) and adjusted basis were discussed earlier. 1040ez instruction Property Received for Services If you receive property for your services, include the FMV of the property in income. 1040ez instruction The amount you include in income becomes your basis. 1040ez instruction If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040ez instruction Restricted property. 1040ez instruction   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. 1040ez instruction However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. 1040ez instruction Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). 1040ez instruction For more information, see Restricted Property in Publication 525. 1040ez instruction Bargain purchases. 1040ez instruction   A bargain purchase is a purchase of an item for less than its FMV. 1040ez instruction If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 1040ez instruction Your basis in the property is its FMV (your purchase price plus the amount you include in income). 1040ez instruction   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. 1040ez instruction However, your basis in the property is still its FMV. 1040ez instruction See Employee Discounts in Publication 15-B. 1040ez instruction Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 1040ez instruction A taxable gain or deductible loss also is known as a recognized gain or loss. 1040ez instruction If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 1040ez instruction Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. 1040ez instruction Similar or related property. 1040ez instruction   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. 1040ez instruction Decrease the basis by the following. 1040ez instruction Any loss you recognize on the involuntary conversion. 1040ez instruction Any money you receive that you do not spend on similar property. 1040ez instruction Increase the basis by the following. 1040ez instruction Any gain you recognize on the involuntary conversion. 1040ez instruction Any cost of acquiring the replacement property. 1040ez instruction Money or property not similar or related. 1040ez instruction    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. 1040ez instruction Example. 1040ez instruction The state condemned your property. 1040ez instruction The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. 1040ez instruction You realized a gain of $5,000 ($31,000 − $26,000). 1040ez instruction You bought replacement property similar in use to the converted property for $29,000. 1040ez instruction You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 1040ez instruction Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 1040ez instruction The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. 1040ez instruction   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040ez instruction Basis for depreciation. 1040ez instruction   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 1040ez instruction For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. 1040ez instruction Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040ez instruction If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. 1040ez instruction See Nontaxable Trades in chapter 14. 1040ez instruction Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040ez instruction To qualify as a like-kind exchange, the property traded and the property received must be both of the following. 1040ez instruction Qualifying property. 1040ez instruction Like-kind property. 1040ez instruction The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. 1040ez instruction If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. 1040ez instruction Qualifying property. 1040ez instruction   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. 1040ez instruction Like-kind property. 1040ez instruction   There must be an exchange of like-kind property. 1040ez instruction Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 1040ez instruction The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. 1040ez instruction Example. 1040ez instruction You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. 1040ez instruction The dealer allows you $2,000 on the old truck, and you pay $4,800. 1040ez instruction This is a like-kind exchange. 1040ez instruction The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). 1040ez instruction If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). 1040ez instruction The basis of the new truck is the price you pay the dealer. 1040ez instruction Partially nontaxable exchanges. 1040ez instruction   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 1040ez instruction The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. 1040ez instruction Decrease the basis by the following amounts. 1040ez instruction Any money you receive. 1040ez instruction Any loss you recognize on the exchange. 1040ez instruction Increase the basis by the following amounts. 1040ez instruction Any additional costs you incur. 1040ez instruction Any gain you recognize on the exchange. 1040ez instruction If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040ez instruction Allocation of basis. 1040ez instruction   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040ez instruction The rest is the basis of the like-kind property. 1040ez instruction More information. 1040ez instruction   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. 1040ez instruction Basis for depreciation. 1040ez instruction   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. 1040ez instruction For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. 1040ez instruction Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 1040ez instruction The same rule applies to a transfer by your former spouse that is incident to divorce. 1040ez instruction However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 1040ez instruction If the property transferred to you is a series E, series EE, or series I U. 1040ez instruction S. 1040ez instruction savings bond, the transferor must include in income the interest accrued to the date of transfer. 1040ez instruction Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 1040ez instruction For more information on these bonds, see chapter 7. 1040ez instruction At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 1040ez instruction For more information about the transfer of property from a spouse, see chapter 14. 1040ez instruction Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 1040ez instruction FMV less than donor's adjusted basis. 1040ez instruction   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040ez instruction Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 1040ez instruction Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 1040ez instruction See Adjusted Basis , earlier. 1040ez instruction Example. 1040ez instruction You received an acre of land as a gift. 1040ez instruction At the time of the gift, the land had an FMV of $8,000. 1040ez instruction The donor's adjusted basis was $10,000. 1040ez instruction After you received the property, no events occurred to increase or decrease your basis. 1040ez instruction If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. 1040ez instruction If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. 1040ez instruction If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 1040ez instruction Business property. 1040ez instruction   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040ez instruction FMV equal to or greater than donor's adjusted basis. 1040ez instruction   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 1040ez instruction Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. 1040ez instruction   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 1040ez instruction See Adjusted Basis , earlier. 1040ez instruction   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 1040ez instruction Figure the increase by multiplying the gift tax paid by a fraction. 1040ez instruction The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 1040ez instruction   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 1040ez instruction The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040ez instruction Example. 1040ez instruction In 2013, you received a gift of property from your mother that had an FMV of $50,000. 1040ez instruction Her adjusted basis was $20,000. 1040ez instruction The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 1040ez instruction She paid a gift tax of $7,320 on the property. 1040ez instruction Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 1040ez instruction 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 1040ez instruction If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 1040ez instruction However, your basis cannot exceed the FMV of the gift at the time it was given to you. 1040ez instruction Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 1040ez instruction The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. 1040ez instruction The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. 1040ez instruction The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 1040ez instruction If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040ez instruction For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. 1040ez instruction Property inherited from a decedent who died in 2010. 1040ez instruction   If you inherited property from a decedent who died in 2010, special rules may apply. 1040ez instruction For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. 1040ez instruction Community property. 1040ez instruction   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 1040ez instruction When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 1040ez instruction For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. 1040ez instruction Example. 1040ez instruction You and your spouse owned community property that had a basis of $80,000. 1040ez instruction When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 1040ez instruction The FMV of the community interest was $100,000. 1040ez instruction The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 1040ez instruction The basis of the other half to your spouse's heirs is also $50,000. 1040ez instruction For more information about community property, see Publication 555, Community Property. 1040ez instruction Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. 1040ez instruction To do so, you must figure its basis for depreciation at the time of the change. 1040ez instruction An example of changing property held for personal use to business or rental use would be renting out your former personal residence. 1040ez instruction Basis for depreciation. 1040ez instruction   The basis for depreciation is the lesser of the following amounts. 1040ez instruction The FMV of the property on the date of the change. 1040ez instruction Your adjusted basis on the date of the change. 1040ez instruction Example. 1040ez instruction Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. 1040ez instruction You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 1040ez instruction Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 1040ez instruction Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040ez instruction On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 1040ez instruction The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). 1040ez instruction Sale of property. 1040ez instruction   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. 1040ez instruction Gain. 1040ez instruction   The basis for figuring a gain is your adjusted basis in the property when you sell the property. 1040ez instruction Example. 1040ez instruction Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 1040ez instruction Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 1040ez instruction Loss. 1040ez instruction   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040ez instruction Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 1040ez instruction Example. 1040ez instruction Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 1040ez instruction In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. 1040ez instruction Reduce that amount ($180,000) by the depreciation deductions ($37,500). 1040ez instruction The basis for loss is $142,500 ($180,000 − $37,500). 1040ez instruction Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 1040ez instruction If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. 1040ez instruction You must adjust the basis of stocks for certain events that occur after purchase. 1040ez instruction For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. 1040ez instruction This rule applies only when the additional stock received is identical to the stock held. 1040ez instruction Also reduce your basis when you receive nontaxable distributions. 1040ez instruction They are a return of capital. 1040ez instruction Example. 1040ez instruction In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. 1040ez instruction In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. 1040ez instruction In 2013 XYZ declared a 2-for-1 stock split. 1040ez instruction You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. 1040ez instruction Other basis. 1040ez instruction   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. 1040ez instruction For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040ez instruction Identifying stocks or bonds sold. 1040ez instruction   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. 1040ez instruction If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 1040ez instruction For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040ez instruction Mutual fund shares. 1040ez instruction   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. 1040ez instruction For more information, see Publication 550. 1040ez instruction Bond premium. 1040ez instruction   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. 1040ez instruction See Bond Premium Amortization in chapter 3 of Publication 550 for more information. 1040ez instruction Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. 1040ez instruction Original issue discount (OID) on debt instruments. 1040ez instruction   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. 1040ez instruction See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. 1040ez instruction Tax-exempt obligations. 1040ez instruction    OID on tax-exempt obligations is generally not taxable. 1040ez instruction However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. 1040ez instruction The accrued OID is added to the basis of the obligation to determine your gain or loss. 1040ez instruction See chapter 4 of Publication 550. 1040ez instruction Prev  Up  Next   Home   More Online Publications
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Appeals Mediation Programs

Alternative Dispute Resolution (ADR)

Mediation is an informal, confidential, and flexible dispute resolution process in which an Appeals Officer trained in mediation techniques serves as an impartial third party facilitating negotiations between the disputing parties.


The Appeals mediators help resolve disputes by identifying the core issues, possible obstacles to settlement, and working with the parties to develop resolution strategies. The Appeals mediator has no power to render a decision or to force either party to accept a settlement. With our Fast Track Settlement program, however, the Appeals mediator may suggest settlement proposals.


Our various mediation programs are designed to serve different types of taxpayers at specific stages of the IRS examination or collection process.

 

If you’re an experienced tax practitioner and know which mediation program you’re interested in, the links in the table below will take you to pages with information, including the application process. If this is all new to you and you have a disagreement with IRS but are not sure whether mediation is right for you, please check out the Appeals Mediation Programs Online Self-Help Tool, which is designed to:

  • Help you understand when to discuss mediation with the IRS person assigned to your case
  • Help you navigate to the mediation program that best fits your needs
  • Explain each program
  • Provide you with the steps, forms and information needed to apply for each program
Type of Taxpayer Stage of IRS Process
Pre-Filing Examination Collection Appeals
Large Business and International

Compliance Assurance Process

Fast Track Settlement
 

Early Referral

 

Post Appeals Mediation

Small Business/Self-Employed  

Fast Track Settlement
 

Early Referral

Fast Track Mediation

Tax Exempt/Government Entities  

Fast Track Settlement
 

Early Referral

 

 

Page Last Reviewed or Updated: 10-Jan-2014

The 1040ez Instruction

1040ez instruction Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. 1040ez instruction Adjustment for premium. 1040ez instruction Adjustment for acquisition premium. 1040ez instruction Adjustment for market discount. 1040ez instruction Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. 1040ez instruction “Original issue discount” is defined first. 1040ez instruction The other terms are listed alphabetically. 1040ez instruction Original issue discount (OID). 1040ez instruction   OID is a form of interest. 1040ez instruction It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). 1040ez instruction Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. 1040ez instruction Accrual period. 1040ez instruction   An accrual period is an interval of time used to measure OID. 1040ez instruction The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. 1040ez instruction Acquisition premium. 1040ez instruction   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. 1040ez instruction A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. 1040ez instruction See Premium, later. 1040ez instruction Adjusted issue price. 1040ez instruction   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. 1040ez instruction In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. 1040ez instruction The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. 1040ez instruction Debt instrument. 1040ez instruction   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). 1040ez instruction It generally does not include an annuity contract. 1040ez instruction Issue price. 1040ez instruction   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. 1040ez instruction Market discount. 1040ez instruction   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. 1040ez instruction An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. 1040ez instruction The market discount is the difference between the issue price plus accrued OID and your adjusted basis. 1040ez instruction Premium. 1040ez instruction   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. 1040ez instruction The premium is the excess of the adjusted basis over the payable amounts. 1040ez instruction See Publication 550 for information on the tax treatment of bond premium. 1040ez instruction Qualified stated interest. 1040ez instruction   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. 1040ez instruction Stated redemption price at maturity. 1040ez instruction   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. 1040ez instruction Yield to maturity (YTM). 1040ez instruction   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. 1040ez instruction The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. 1040ez instruction If you do not have this information, consult your broker, tax advisor, or the issuer. 1040ez instruction Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. 1040ez instruction If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. 1040ez instruction The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. 1040ez instruction For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. 1040ez instruction The following discussions explain what information is contained in each section of the list. 1040ez instruction Section I. 1040ez instruction   This section contains publicly offered, long-term debt instruments. 1040ez instruction Section I-A: Corporate Debt Instruments Issued Before 1985. 1040ez instruction Section I-B: Corporate Debt Instruments Issued After 1984. 1040ez instruction Section I-C: Inflation-Indexed Debt Instruments. 1040ez instruction For each publicly offered debt instrument in Section I, the list contains the following information. 1040ez instruction The name of the issuer. 1040ez instruction The Committee on Uniform Security Identification Procedures (CUSIP) number. 1040ez instruction The issue date. 1040ez instruction The maturity date. 1040ez instruction The issue price expressed as a percent of principal or of stated redemption price at maturity. 1040ez instruction The annual stated or coupon interest rate. 1040ez instruction (This rate is shown as 0. 1040ez instruction 00 if no annual interest payments are provided. 1040ez instruction ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. 1040ez instruction The total OID accrued up to January 1 of a calendar year. 1040ez instruction (This information is not available for every instrument. 1040ez instruction ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. 1040ez instruction The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. 1040ez instruction Section II. 1040ez instruction   This section contains stripped coupons and principal components of U. 1040ez instruction S. 1040ez instruction Treasury and Government-Sponsored Enterprise debt instruments. 1040ez instruction These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. 1040ez instruction This section also includes debt instruments backed by U. 1040ez instruction S. 1040ez instruction Treasury securities that represent ownership interests in those securities. 1040ez instruction   The obligations listed in Section II are arranged by maturity date. 1040ez instruction The amounts listed are the total OID for a calendar year per $1,000 of redemption price. 1040ez instruction Section III. 1040ez instruction   This section contains short-term discount obligations. 1040ez instruction Section III-A: Short-Term U. 1040ez instruction S. 1040ez instruction Treasury Bills. 1040ez instruction Section III-B: Federal Home Loan Banks. 1040ez instruction Section III-C: Federal National Mortgage Association. 1040ez instruction Section III-D: Federal Farm Credit Banks. 1040ez instruction Section III-E: Federal Home Loan Mortgage Corporation. 1040ez instruction Section III-F: Federal Agricultural Mortgage Corporation. 1040ez instruction    Information that supplements Section III-A is available on the Internet at http://www. 1040ez instruction treasurydirect. 1040ez instruction gov/tdhome. 1040ez instruction htm. 1040ez instruction   The short-term obligations listed in this section are arranged by maturity date. 1040ez instruction For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. 1040ez instruction Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. 1040ez instruction Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. 1040ez instruction U. 1040ez instruction S. 1040ez instruction savings bonds. 1040ez instruction Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. 1040ez instruction Obligations issued by tax-exempt organizations. 1040ez instruction OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. 1040ez instruction Mortgage-backed securities and mortgage participation certificates. 1040ez instruction Long-term OID debt instruments issued before May 28, 1969. 1040ez instruction Short-term obligations, other than the obligations listed in Section III. 1040ez instruction Debt instruments issued at a discount by states or their political subdivisions. 1040ez instruction REMIC regular interests and CDOs. 1040ez instruction Commercial paper and banker's acceptances issued at a discount. 1040ez instruction Obligations issued at a discount by individuals. 1040ez instruction Foreign obligations not traded in the United States and obligations not issued in the United States. 1040ez instruction Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. 1040ez instruction In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. 1040ez instruction You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. 1040ez instruction See Backup Withholding, later. 1040ez instruction If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. 1040ez instruction File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). 1040ez instruction Electronic payee statements. 1040ez instruction   You can issue Form 1099-OID electronically with the consent of the recipient. 1040ez instruction More information. 1040ez instruction   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. 1040ez instruction Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. 1040ez instruction To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. 1040ez instruction If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. 1040ez instruction Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. 1040ez instruction If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. 1040ez instruction A special rule is used to determine the original issue price for information reporting on U. 1040ez instruction S. 1040ez instruction Treasury bills (T-bills) listed in Section III-A. 1040ez instruction Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. 1040ez instruction This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. 1040ez instruction A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. 1040ez instruction Example 1. 1040ez instruction There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. 1040ez instruction The price actually paid by the owner cannot be established by owner or middleman records. 1040ez instruction You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. 1040ez instruction The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. 1040ez instruction Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. 1040ez instruction For this purpose, you can rely on Section I of the OID list to determine the following information. 1040ez instruction Whether a debt instrument has OID. 1040ez instruction The OID to be reported on the Form 1099-OID. 1040ez instruction In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. 1040ez instruction You also can report OID on other long-term debt instruments. 1040ez instruction Form 1099-OID. 1040ez instruction   On Form 1099-OID for a calendar year show the following information. 1040ez instruction Box 1. 1040ez instruction The OID for the actual dates the owner held the debt instruments during a calendar year. 1040ez instruction To determine this amount, see Figuring OID, next. 1040ez instruction Box 2. 1040ez instruction The qualified stated interest paid or credited during the calendar year. 1040ez instruction Interest reported here is not reported on Form 1099-INT. 1040ez instruction The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. 1040ez instruction Box 3. 1040ez instruction Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. 1040ez instruction Do not reduce the amounts in boxes 1 and 2 by the forfeiture. 1040ez instruction Box 4. 1040ez instruction Any backup withholding for this debt instrument. 1040ez instruction Box 7. 1040ez instruction The CUSIP number, if any. 1040ez instruction If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. 1040ez instruction 50 2006). 1040ez instruction If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. 1040ez instruction Box 8. 1040ez instruction The OID on a U. 1040ez instruction S. 1040ez instruction Treasury obligation for the part of the year the owner held the debt instrument. 1040ez instruction Box 9. 1040ez instruction Investment expenses passed on to holders of a single-class REMIC. 1040ez instruction Boxes 10-12. 1040ez instruction Use to report any state income tax withheld for this debt instrument. 1040ez instruction Figuring OID. 1040ez instruction   You can determine the OID on a long-term debt instrument by using either of the following. 1040ez instruction Section I of the OID list. 1040ez instruction The income tax regulations. 1040ez instruction Using Section I. 1040ez instruction   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. 1040ez instruction Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. 1040ez instruction For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. 1040ez instruction   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. 1040ez instruction Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. 1040ez instruction Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. 1040ez instruction Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. 1040ez instruction Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. 1040ez instruction If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. 1040ez instruction Report the result on Form 1099-OID in box 1. 1040ez instruction Using the income tax regulations. 1040ez instruction   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. 1040ez instruction For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. 1040ez instruction (If you use Section I-B, the OID is figured using 6-month accrual periods. 1040ez instruction )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. 1040ez instruction Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. 1040ez instruction You must file an information return showing the reportable interest and OID, if any, on the CD. 1040ez instruction These rules apply whether or not you sold the CD to the owner. 1040ez instruction Report OID on a CD in the same way as OID on other debt instruments. 1040ez instruction See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. 1040ez instruction Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. 1040ez instruction However, do not report the interest if either of the following apply. 1040ez instruction You hold the bond as a nominee for the true owner. 1040ez instruction The payee is a foreign person. 1040ez instruction See Payments to foreign person under Backup Withholding, later. 1040ez instruction Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. 1040ez instruction The coupon may have been “stripped” (separated) from the bond and separately purchased. 1040ez instruction However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. 1040ez instruction Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. 1040ez instruction The backup withholding is deducted at the time a cash payment is made. 1040ez instruction See Pub. 1040ez instruction 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. 1040ez instruction Backup withholding generally applies in the following situations. 1040ez instruction The payee does not give you a taxpayer identification number (TIN). 1040ez instruction The IRS notifies you that the payee gave an incorrect TIN. 1040ez instruction The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. 1040ez instruction For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. 1040ez instruction However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. 1040ez instruction S. 1040ez instruction savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. 1040ez instruction Short-term obligations. 1040ez instruction   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. 1040ez instruction However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. 1040ez instruction   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. 1040ez instruction However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. 1040ez instruction If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. 1040ez instruction Long-term obligations. 1040ez instruction   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. 1040ez instruction The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. 1040ez instruction The amount to be withheld is limited to the cash paid. 1040ez instruction Registered long-term obligations with cash payments. 1040ez instruction   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. 1040ez instruction The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. 1040ez instruction If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. 1040ez instruction For any payment, the required withholding is limited to the cash paid. 1040ez instruction Payee not the original owner. 1040ez instruction   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). 1040ez instruction The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. 1040ez instruction Bearer long-term obligations with cash payments. 1040ez instruction   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. 1040ez instruction For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. 1040ez instruction For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. 1040ez instruction The required withholding at maturity is limited to the cash paid. 1040ez instruction Sales and redemptions. 1040ez instruction   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. 1040ez instruction Backup withholding applies in the following situations. 1040ez instruction The payee does not give you a TIN. 1040ez instruction The IRS notifies you that the payee gave an incorrect TIN. 1040ez instruction For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. 1040ez instruction Payments outside the United States to U. 1040ez instruction S. 1040ez instruction person. 1040ez instruction   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. 1040ez instruction S. 1040ez instruction person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. 1040ez instruction S. 1040ez instruction trade or business. 1040ez instruction Payments to foreign person. 1040ez instruction   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. 1040ez instruction U. 1040ez instruction S. 1040ez instruction -source amount. 1040ez instruction   Backup withholding and information reporting are not required for payments of U. 1040ez instruction S. 1040ez instruction -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. 1040ez instruction A U. 1040ez instruction S. 1040ez instruction resident is not a foreign person. 1040ez instruction For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. 1040ez instruction Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. 1040ez instruction S. 1040ez instruction person. 1040ez instruction   For information about the 28% withholding tax that may apply to payments of U. 1040ez instruction S. 1040ez instruction -source OID or interest to foreign persons, see Publication 515. 1040ez instruction Foreign-source amount. 1040ez instruction   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. 1040ez instruction However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. 1040ez instruction More information. 1040ez instruction   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. 1040ez instruction 6049-5. 1040ez instruction Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. 1040ez instruction It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. 1040ez instruction It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. 1040ez instruction However, the information provided does not cover every situation. 1040ez instruction More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. 1040ez instruction Including OID in income. 1040ez instruction   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. 1040ez instruction Exceptions. 1040ez instruction   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. 1040ez instruction U. 1040ez instruction S. 1040ez instruction savings bonds. 1040ez instruction Tax-exempt obligations. 1040ez instruction (However, see Tax-Exempt Bonds and Coupons, later. 1040ez instruction ) Obligations issued by individuals before March 2, 1984. 1040ez instruction Loans of $10,000 or less between individuals who are not in the business of lending money. 1040ez instruction (The dollar limit includes outstanding prior loans by the lender to the borrower. 1040ez instruction ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. 1040ez instruction   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. 1040ez instruction Publication 550 also discusses rules for holders of REMIC interests and CDOs. 1040ez instruction De minimis rule. 1040ez instruction   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. 1040ez instruction 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. 1040ez instruction Debt instruments with de minimis OID are not listed in this publication. 1040ez instruction There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. 1040ez instruction Also, the de minimis rules generally do not apply to tax-exempt obligations. 1040ez instruction Example 2. 1040ez instruction You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. 1040ez instruction One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. 1040ez instruction Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. 1040ez instruction Example 3. 1040ez instruction Assume the same facts as Example 2, except the debt instrument was issued at $950. 1040ez instruction You must report part of the $50 OID each year because it is more than $25. 1040ez instruction Choice to report all interest as OID. 1040ez instruction   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. 1040ez instruction See Constant yield method under Debt Instruments Issued After 1984, later, for more information. 1040ez instruction   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. 1040ez instruction For more information, see Regulations section 1. 1040ez instruction 1272-3. 1040ez instruction Purchase after date of original issue. 1040ez instruction   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. 1040ez instruction If so, the OID reported to you on Form 1099-OID may have to be adjusted. 1040ez instruction For more information, see Showing an OID adjustment under How To Report OID, later. 1040ez instruction The following rules generally do not apply to contingent payment debt instruments. 1040ez instruction Adjustment for premium. 1040ez instruction   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. 1040ez instruction Your adjustment is the total OID shown on your Form 1099-OID. 1040ez instruction Adjustment for acquisition premium. 1040ez instruction   If your debt instrument has acquisition premium, reduce the OID you report. 1040ez instruction Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. 1040ez instruction Adjustment for market discount. 1040ez instruction   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. 1040ez instruction Your adjustment is the accrued market discount for the year. 1040ez instruction See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. 1040ez instruction If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. 1040ez instruction The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. 1040ez instruction For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. 1040ez instruction 1275-7. 1040ez instruction Sale, exchange, or redemption. 1040ez instruction   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. 1040ez instruction If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. 1040ez instruction Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). 1040ez instruction   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. 1040ez instruction Your basis, generally, is your cost increased by the OID you have included in income each year you held it. 1040ez instruction In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. 1040ez instruction   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. 1040ez instruction Example 4. 1040ez instruction Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. 1040ez instruction 00 on November 1 of Year 1. 1040ez instruction The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. 1040ez instruction The debt instrument provides for semiannual payments of interest at 10%. 1040ez instruction Assume the debt instrument is a capital asset in Larry's hands. 1040ez instruction The debt instrument has $13,765. 1040ez instruction 00 of OID ($100,000 stated redemption price at maturity minus $86,235. 1040ez instruction 00 issue price). 1040ez instruction Larry sold the debt instrument for $90,000 on November 1 of Year 4. 1040ez instruction Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. 1040ez instruction 00 of OID in income and has increased his basis by that amount to $90,791. 1040ez instruction 00. 1040ez instruction Larry has realized a loss of $791. 1040ez instruction 00. 1040ez instruction All of Larry's loss is capital loss. 1040ez instruction Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. 1040ez instruction Form 1099-OID shows all OID income in box 1 except OID on a U. 1040ez instruction S. 1040ez instruction Treasury obligation, which is shown in box 8. 1040ez instruction It also shows, in box 2, any qualified stated interest you must include in income. 1040ez instruction (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. 1040ez instruction ) A copy of Form 1099-OID will be sent to the IRS. 1040ez instruction Do not attach your copy to your tax return. 1040ez instruction Keep it for your records. 1040ez instruction If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. 1040ez instruction A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. 1040ez instruction Form 1099-OID not received. 1040ez instruction   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. 1040ez instruction Refiguring OID. 1040ez instruction   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. 1040ez instruction You bought the debt instrument at a premium or at an acquisition premium. 1040ez instruction The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. 1040ez instruction S. 1040ez instruction Treasury securities). 1040ez instruction The debt instrument is a contingent payment or inflation-indexed debt instrument. 1040ez instruction See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. 1040ez instruction Refiguring interest. 1040ez instruction   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. 1040ez instruction Nominee. 1040ez instruction   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. 1040ez instruction ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. 1040ez instruction Show the owner of the debt instrument as the “recipient” and you as the “payer. 1040ez instruction ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. 1040ez instruction You must also give a copy of the Form 1099-OID to the actual owner. 1040ez instruction However, you are not required to file a nominee return to show amounts belonging to your spouse. 1040ez instruction See the Form 1099 instructions for more information. 1040ez instruction   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. 1040ez instruction How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. 1040ez instruction Form 1040 or Form 1040A required. 1040ez instruction   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. 1040ez instruction You received a Form 1099-OID as a nominee for the actual owner. 1040ez instruction Your total interest and OID income for the year was more than $1,500. 1040ez instruction Form 1040 required. 1040ez instruction   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. 1040ez instruction For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. 1040ez instruction Also, you must use Form 1040 if you were charged an early withdrawal penalty. 1040ez instruction Where to report. 1040ez instruction   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. 1040ez instruction Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. 1040ez instruction Also include any other OID and interest income for which you did not receive a Form 1099. 1040ez instruction Showing an OID adjustment. 1040ez instruction   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. 1040ez instruction   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. 1040ez instruction If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. 1040ez instruction Under your last entry on line 1, subtotal all interest and OID income listed on line 1. 1040ez instruction Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. 1040ez instruction Subtract that OID from the subtotal and enter the result on line 2. 1040ez instruction If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. 1040ez instruction Under your last entry on line 1, subtotal all interest and OID income listed on line 1. 1040ez instruction Below the subtotal, write “OID Adjustment” and show the additional OID. 1040ez instruction Add that OID to the subtotal and enter the result on line 2. 1040ez instruction Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. 1040ez instruction It also may depend on the type of the debt instrument. 1040ez instruction There are different rules for each of the following debt instruments. 1040ez instruction Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. 1040ez instruction Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. 1040ez instruction Debt instruments issued after July 1, 1982, and before 1985. 1040ez instruction Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). 1040ez instruction Contingent payment debt instruments issued after August 12, 1996. 1040ez instruction Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. 1040ez instruction Zero coupon bonds. 1040ez instruction   The rules for figuring OID on zero coupon bonds backed by U. 1040ez instruction S. 1040ez instruction Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. 1040ez instruction Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. 1040ez instruction The OID, which is taxed as ordinary income, generally equals the following amount. 1040ez instruction   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. 1040ez instruction If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. 1040ez instruction Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. 1040ez instruction For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. 1040ez instruction Your basis in the debt instrument is increased by the OID you include in income. 1040ez instruction Form 1099-OID. 1040ez instruction   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. 1040ez instruction However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. 1040ez instruction See Reduction for acquisition premium, later. 1040ez instruction If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. 1040ez instruction irs. 1040ez instruction gov/pub1212 by clicking the link under Recent Developments. 1040ez instruction Form 1099-OID not received. 1040ez instruction    The OID listed is for each $1,000 of redemption price. 1040ez instruction You must adjust the listed amount if your debt instrument has a different principal amount. 1040ez instruction For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. 1040ez instruction   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. 1040ez instruction (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. 1040ez instruction ) If you did not hold the debt instrument the entire year, figure your OID using the following method. 1040ez instruction Divide the OID shown by 12. 1040ez instruction Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. 1040ez instruction This is the OID to include in income unless you paid an acquisition premium. 1040ez instruction The reduction for acquisition premium is discussed next. 1040ez instruction Reduction for acquisition premium. 1040ez instruction   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. 1040ez instruction Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. 1040ez instruction This is the monthly OID. 1040ez instruction Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. 1040ez instruction (If the result is zero or less, stop here. 1040ez instruction You did not pay an acquisition premium. 1040ez instruction ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. 1040ez instruction Subtract the amount figured in (3) from the amount figured in (1). 1040ez instruction This is the OID to include in income for each month you hold the debt instrument during the year. 1040ez instruction Transfers during the month. 1040ez instruction   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. 1040ez instruction Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. 1040ez instruction Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. 1040ez instruction For information about showing the correct OID on your tax return, see How To Report OID, earlier. 1040ez instruction Form 1099-OID. 1040ez instruction   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. 1040ez instruction However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. 1040ez instruction See Constant yield method and the discussions on acquisition premium that follow, later. 1040ez instruction If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. 1040ez instruction irs. 1040ez instruction gov/pub1212 by clicking the link under Recent Developments. 1040ez instruction Form 1099-OID not received. 1040ez instruction    The OID listed is for each $1,000 of redemption price. 1040ez instruction You must adjust the listed amount if your debt instrument has a different principal amount. 1040ez instruction For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. 1040ez instruction   If you held the debt instrument the entire year, use the OID shown in Section I-A. 1040ez instruction (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. 1040ez instruction ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. 1040ez instruction Method 1. 1040ez instruction    Divide the total OID for a calendar year by 365 (366 for leap years). 1040ez instruction Multiply the result in (1) by the number of days you held the debt instrument during that particular year. 1040ez instruction  This computation is an approximation and may result in a slightly higher OID than Method 2. 1040ez instruction Method 2. 1040ez instruction    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. 1040ez instruction (See Accrual period under Constant yield method, next. 1040ez instruction ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. 1040ez instruction If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. 1040ez instruction Add the results of (2) and (3). 1040ez instruction This is the OID to include in income, unless you paid an acquisition premium. 1040ez instruction (The reduction for acquisition premium is discussed later. 1040ez instruction ) Constant yield method. 1040ez instruction   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. 1040ez instruction OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. 1040ez instruction   Figure the OID allocable to any accrual period as follows. 1040ez instruction Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. 1040ez instruction Subtract from the result in (1) any qualified stated interest allocable to the accrual period. 1040ez instruction Accrual period. 1040ez instruction   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. 1040ez instruction Your tax year will usually include parts of two accrual periods. 1040ez instruction Daily OID. 1040ez instruction   The OID for any accrual period is allocated equally to each day in the accrual period. 1040ez instruction You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. 1040ez instruction If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. 1040ez instruction Figuring daily OID. 1040ez instruction   The daily OID for the initial accrual period is figured using the following formula. 1040ez instruction   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. 1040ez instruction Reduction for acquisition premium on debt instruments purchased before July 19, 1984. 1040ez instruction   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. 1040ez instruction Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. 1040ez instruction Reduction for acquisition premium on debt instruments purchased after July 18, 1984. 1040ez instruction   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. 1040ez instruction However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. 1040ez instruction To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. 1040ez instruction The numerator is the acquisition premium. 1040ez instruction The denominator is the total OID remaining for the debt instrument after your purchase date. 1040ez instruction Section I-A is available at www. 1040ez instruction irs. 1040ez instruction gov/pub1212 and clicking the link under Recent Developments. 1040ez instruction Using Section I-A to figure accumulated OID. 1040ez instruction   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. 1040ez instruction The amount from the “Total OID to January 1, YYYY” column for your debt instrument. 1040ez instruction The OID from January 1 of a calendar year to the date of purchase, figured as follows. 1040ez instruction Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. 1040ez instruction Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. 1040ez instruction Add the amounts figured in (2a) and (2b). 1040ez instruction Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. 1040ez instruction You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. 1040ez instruction Your basis in the debt instrument is increased by the OID you include in income. 1040ez instruction For information about showing the correct OID on your tax return, see How To Report OID, earlier. 1040ez instruction Form 1099-OID. 1040ez instruction   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. 1040ez instruction However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. 1040ez instruction See Constant yield method and Reduction for acquisition premium, later. 1040ez instruction   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. 1040ez instruction See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. 1040ez instruction If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. 1040ez instruction irs. 1040ez instruction gov/pub1212 by clicking the link under Recent Developments. 1040ez instruction Form 1099-OID not received. 1040ez instruction   The OID listed is for each $1,000 of redemption price. 1040ez instruction You must adjust the listed amount if your debt instrument has a different principal amount. 1040ez instruction For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. 1040ez instruction   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. 1040ez instruction (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. 1040ez instruction ) If you did not hold the debt instrument the entire year, figure your OID as follows. 1040ez instruction Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. 1040ez instruction (See Accrual period under Constant yield method, later. 1040ez instruction ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. 1040ez instruction Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. 1040ez instruction Add the results of (2) and (3). 1040ez instruction This is the OID to include in income for that year, unless you paid an acquisition premium. 1040ez instruction (The reduction for acquisition premium is discussed later. 1040ez instruction ) Tax-exempt bond. 1040ez instruction   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. 1040ez instruction You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. 1040ez instruction In general, use the rules that follow to determine your OID. 1040ez instruction Constant yield method. 1040ez instruction   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. 1040ez instruction (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. 1040ez instruction ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. 1040ez instruction   Figure the OID allocable to any accrual period as follows. 1040ez instruction Multiply the adjusted issue price at the beginning of the accrual period by a fraction. 1040ez instruction The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. 1040ez instruction The yield must be stated appropriately taking into account the length of the particular accrual period. 1040ez instruction Subtract from the result in (1) any qualified stated interest allocable to the accrual period. 1040ez instruction Accrual period. 1040ez instruction   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. 1040ez instruction For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. 1040ez instruction Any short period is included as the first accrual period. 1040ez instruction   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. 1040ez instruction However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. 1040ez instruction Daily OID. 1040ez instruction   The OID for any accrual period is allocated equally to each day in the accrual period. 1040ez instruction Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. 1040ez instruction Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. 1040ez instruction If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. 1040ez instruction Figuring daily OID. 1040ez instruction   The daily OID for the initial accrual period is figured using the following formula. 1040ez instruction   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. 1040ez instruction Example 5. 1040ez instruction On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. 1040ez instruction 17. 1040ez instruction According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. 1040ez instruction The yield to maturity is 12%, compounded semiannually. 1040ez instruction The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. 1040ez instruction The accrual periods are the 6-month periods ending on each of these dates. 1040ez instruction The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). 1040ez instruction The daily OID for the first accrual period is figured as follows. 1040ez instruction   ($86,235. 1040ez instruction 17 x . 1040ez instruction 12/2) – $5,000     181 days     = $174. 1040ez instruction 11020 = $. 1040ez instruction 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. 1040ez instruction 17 + $174. 1040ez instruction 11), or $86,409. 1040ez instruction 28. 1040ez instruction The number of days for the second accrual period (July 1 through December 31) is 184 days. 1040ez instruction The daily OID for the second accrual period is figured as follows. 1040ez instruction   ($86,409. 1040ez instruction 28 x . 1040ez instruction 12/2) – $5,000     184 days     = $184. 1040ez instruction 55681 = $1. 1040ez instruction 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. 1040ez instruction 11 ($. 1040ez instruction 95665 × 182 days) plus $184. 1040ez instruction 56 ($1. 1040ez instruction 00303 × 184 days), or $358. 1040ez instruction 67. 1040ez instruction Add the OID to the $10,000 interest you report on your income tax return for Year 1. 1040ez instruction Example 6. 1040ez instruction Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. 1040ez instruction Also, the interest payment dates are October 31 and April 30 of each calendar year. 1040ez instruction The accrual periods are the 6-month periods ending on each of these dates. 1040ez instruction The number of days for the first accrual period (May 1 through October 31) is 184 days. 1040ez instruction The daily OID for the first accrual period is figured as follows. 1040ez instruction   ($86,235. 1040ez instruction 17 x . 1040ez instruction 12/2) – $5,000     184 days     = $174. 1040ez instruction 11020 = $. 1040ez instruction 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). 1040ez instruction The daily OID for the second accrual period is figured as follows. 1040ez instruction   ($86,409. 1040ez instruction 28 x . 1040ez instruction 12/2) – $5,000     181 days     = $184. 1040ez instruction 55681 = $1. 1040ez instruction 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. 1040ez instruction 31 of OID in income. 1040ez instruction This is $174. 1040ez instruction 11 ($. 1040ez instruction 94625 × 184 days) for the period May 1 through October 31 plus $62. 1040ez instruction 20 ($1. 1040ez instruction 01965 × 61 days) for the period November 1 through December 31. 1040ez instruction The OID is added to the $5,000 interest income paid on October 31 of Year 1. 1040ez instruction Your basis in the debt instrument is increased by the OID you include in income. 1040ez instruction On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. 1040ez instruction 48 ($86,235. 1040ez instruction 17 + $236. 1040ez instruction 31). 1040ez instruction Short first accrual period. 1040ez instruction   You may have to make adjustments if a debt instrument has a short first accrual period. 1040ez instruction For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. 1040ez instruction (The remaining accrual periods begin on May 1 and November 1. 1040ez instruction ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. 1040ez instruction You may use any reasonable compounding method in determining OID for a short period. 1040ez instruction Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). 1040ez instruction Consult your tax advisor for more information about making this computation. 1040ez instruction   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. 1040ez instruction Reduction for acquisition premium. 1040ez instruction   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. 1040ez instruction To figure the daily acquisition premium, multiply the daily OID by the following fraction. 1040ez instruction The numerator is the acquisition premium. 1040ez instruction The denominator is the total OID remaining for the debt instrument after your purchase date. 1040ez instruction Example 7. 1040ez instruction Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. 1040ez instruction The adjusted issue price on November 1 of Year 1 is $86,409. 1040ez instruction 28 ($86,235. 1040ez instruction 17 + $174. 1040ez instruction 11). 1040ez instruction In this case, you paid an acquisition premium of $590. 1040ez instruction 72 ($87,000 − $86,409. 1040ez instruction 28). 1040ez instruction The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. 1040ez instruction 1) Daily OID on date of purchase (2nd accrual period) $1. 1040ez instruction 01965*  2)  Acquisition premium $590. 1040ez instruction 72    3)  Total OID remaining after purchase date ($13,764. 1040ez instruction 83 − $174. 1040ez instruction 11) 13,590. 1040ez instruction 72   4) Line 2 ÷ line 3 . 1040ez instruction 04346  5)  Line 1 × line 4 . 1040ez instruction 04432  6)  Daily OID reduced for the acquisition premium. 1040ez instruction Line 1 − line 5 $0. 1040ez instruction 97533  * As shown in Example 6. 1040ez instruction The total OID to include in income for Year 1 is $59. 1040ez instruction 50 ($. 1040ez instruction 97533 × 61 days). 1040ez instruction Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. 1040ez instruction In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. 1040ez instruction If you hold a contingent payment bond, you must report OID as it accrues each year. 1040ez instruction Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. 1040ez instruction To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. 1040ez instruction Noncontingent bond method. 1040ez instruction    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. 1040ez instruction In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. 1040ez instruction When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. 1040ez instruction If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. 1040ez instruction If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. 1040ez instruction Form 1099-OID. 1040ez instruction   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. 1040ez instruction For example, the amount may not be correct if the contingent payment was different from the projected amount. 1040ez instruction If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. 1040ez instruction For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. 1040ez instruction Figuring OID. 1040ez instruction   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. 1040ez instruction The issuer must make these available to you. 1040ez instruction Comparable yield. 1040ez instruction   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. 1040ez instruction The comparable yield is determined as of the debt instrument's issue date. 1040ez instruction Projected payment schedule. 1040ez instruction   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. 1040ez instruction The projected payment schedule is created by the issuer as of the debt instrument's issue date. 1040ez instruction It is used to determine the issuer's and holder's interest accruals and adjustments. 1040ez instruction Steps for figuring OID. 1040ez instruction   Figure the OID on a contingent payment debt instrument in two steps. 1040ez instruction Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. 1040ez instruction Use the comparable yield as the yield to maturity. 1040ez instruction In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). 1040ez instruction Do not treat any amount payable as qualified stated interest. 1040ez instruction Adjust the OID in (1) to account for actual contingent payments. 1040ez instruction If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. 1040ez instruction If the contingent payment is less than the projected fixed amount, you have a negative adjustment. 1040ez instruction Net positive adjustment. 1040ez instruction   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. 1040ez instruction Treat a net positive adjustment as additional OID for the tax year. 1040ez instruction Net negative adjustment. 1040ez instruction   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. 1040ez instruction Use a net negative adjustment to offset OID on the debt instrument for the tax year. 1040ez instruction If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. 1040ez instruction However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. 1040ez instruction You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. 1040ez instruction Basis adjustments. 1040ez instruction   In general, increase your basis in a contingent payment debt instrument by the OID included in income. 1040ez instruction Your basis, however, is not affected by any negative or positive adjustments. 1040ez instruction Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. 1040ez instruction Treatment of gain or loss on sale or exchange. 1040ez instruction   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. 1040ez instruction If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. 1040ez instruction If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. 1040ez instruction See Regulations section 1. 1040ez instruction 1275-4 for exceptions to these rules. 1040ez instruction Premium, acquisition premium, and market discount. 1040ez instruction   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. 1040ez instruction See Regulations section 1. 1040ez instruction 1275-4 to determine how to account for these items. 1040ez instruction Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. 1040ez instruction An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d