Form 1099-OID: Original Issue Discount (2012) – A Complete Guide
What the Form Is For
Form 1099-OID is a tax form used to report “original issue discount” (OID) income you earned during the 2012 tax year. But what exactly is original issue discount? Think of it this way: when you buy certain bonds, notes, or certificates of deposit (CDs) at a discount—meaning you pay less than what you'll receive when they mature—the difference between what you paid and what you'll get back is called original issue discount, or OID.
Here's a simple example: imagine you purchase a bond for $900 that will pay you $1,000 when it matures in five years. That $100 difference is the OID, and the IRS considers it a form of interest income that you need to report on your taxes each year, even though you haven't actually received the money yet.
Financial institutions—including banks, brokerage firms, and bond issuers—use Form 1099-OID to tell both you and the IRS how much OID income you need to report for the year. You'll typically receive this form if you held debt instruments like bonds, debentures, notes, certificates, or long-term CDs (those with terms longer than one year) that were issued at a discount. The form also reports other periodic interest you earned and any early withdrawal penalties you paid.
When You'd Use This Form (Late/Amended Filings)
Under normal circumstances, you should receive your Form 1099-OID from your financial institution by January 31, 2013 (for the 2012 tax year). The institution must file Copy A with the IRS by February 28, 2013, or by April 1, 2013 if filing electronically.
Common Scenarios Requiring Amendments
- Late or corrected 1099-OID forms – Sometimes financial institutions discover errors and send corrected forms marked “CORRECTED” in the checkbox at the top.
- Unreported OID obligations – You realize after filing that you forgot to include OID from a particular bond or CD.
- OID calculation errors – The amount on the form may not reflect your actual holding period if you bought or sold the obligation mid-year.
If you're a nominee (someone who holds an investment in your name for another person), you're responsible for preparing and filing Form 1099-OID for the actual owner, even after the standard deadline has passed.
Key Rules for 2012
Several important rules governed Form 1099-OID reporting in 2012:
Reporting Thresholds and Requirements
- Minimum reporting threshold – Financial institutions only had to issue Form 1099-OID if your OID income was $10 or more during the year.
- Foreign or backup withholding – The form was required regardless of amount if foreign or federal tax was withheld.
What Gets Reported
The form reports OID on obligations with terms of more than one year, including bonds, notes, debentures, and long-term CDs. Short-term obligations (one year or less) were reported on Form 1099-INT instead.
Backup Withholding
If you failed to provide your taxpayer identification number (TIN) or provided an incorrect TIN, institutions withheld 28% of your OID income and reported it in Box 4 of the form.
Treasury Obligations
OID on U.S. Treasury obligations received special treatment and was reported separately in Box 6, as this income is exempt from state and local taxes.
Nominee Responsibilities
If you received a Form 1099-OID as a record holder but the investment belongs to someone else, you must prepare a separate Form 1099-OID for the actual owner. Note that spouses don't need to file nominee returns for each other.
TIN Truncation
Starting in 2012, financial institutions were permitted to show only the last four digits of your Social Security number on Copy B (your copy) for privacy protection, though they reported the full number to the IRS.
Step-by-Step Process (High Level)
Understanding how to handle your Form 1099-OID doesn't have to be complicated. Here's the basic process:
Step 1: Receive Your Form
Your financial institution sends Form 1099-OID by January 31. Review it carefully as soon as it arrives.
Step 2: Verify the Information
Check that your name, Social Security number, and the OID amount match your records. If you bought or sold the obligation during the year, the amount shown may need adjustment.
Step 3: Understand What Each Box Means
- Box 1: OID for the year (main figure you’ll report).
- Box 2: Other periodic interest.
- Box 3: Any early withdrawal penalty (deductible).
- Box 4: Federal tax withheld.
- Box 6: OID on Treasury obligations.
Step 4: Determine If Adjustments Are Needed
You may need to adjust the Box 1 amount if you paid a premium for the bond, acquired it after original issue, or sold it during the year. IRS Publication 1212 provides detailed calculation tables for these situations.
Step 5: Report on Your Tax Return
Report the OID from Box 1 as interest income on Schedule B (Interest and Ordinary Dividends) of Form 1040. Treasury obligation OID from Box 6 is also reported but is exempt from state taxes.
Step 6: Claim Deductions
If Box 3 shows an early withdrawal penalty, you can deduct this amount to arrive at your adjusted gross income. If Box 7 shows investment expenses from a REMIC, these go on Schedule A subject to the 2% limit.
Step 7: Account for Withholding
Any amount in Box 4 (federal tax withheld) gets credited toward your total tax liability when you complete your return.
Common Mistakes and How to Avoid Them
Even experienced taxpayers can stumble with Form 1099-OID. Here are the most common errors and how to prevent them:
Mistake #1: Reporting the Wrong OID Amount
Many people simply copy Box 1 onto their tax return, but if you bought the obligation after it was issued or sold it before year-end, this amount may be incorrect.
Solution: Consult IRS Publication 1212 for correct OID calculations.
Mistake #2: Double-Reporting Interest
Some obligations generate both OID (Box 1) and other periodic interest (Box 2).
Solution: Ensure you don’t duplicate reporting if you also received Form 1099-INT.
Mistake #3: Forgetting About Early Withdrawal Penalties
If you cashed in a CD early and Box 3 shows a penalty, this is a valuable deduction you can claim even if you don't itemize.
Solution: Take this deduction on Form 1040, line 30 (for 2012).
Mistake #4: Mishandling Treasury Obligations
OID from U.S. Treasury obligations (Box 6) should not be added to Box 1—it's reported separately and is exempt from state and local taxes.
Solution: Keep these amounts separate on your state return.
Mistake #5: Ignoring Acquisition Premium Adjustments
If you paid more than the adjusted issue price for a bond, you can reduce your annual OID income.
Solution: Keep purchase records and apply IRS formulas correctly.
Mistake #6: Nominee Reporting Failures
If you hold an investment for someone else, failing to issue them a Form 1099-OID by the deadline can result in penalties.
Solution: Prepare nominee returns promptly after receiving your own form.
What Happens After You File
Once you've filed your tax return including Form 1099-OID information, the IRS matches the amounts you reported against the information returns filed by financial institutions. This matching process typically happens months after you file.
Possible Outcomes
- If everything matches correctly: You’ll likely hear nothing, which means your OID was correctly reported.
- If discrepancies are found: You may receive a CP2000 notice proposing additional tax, interest, and possibly penalties.
- If tax was withheld (Box 4): It is credited against your total tax liability and could increase your refund.
- If you had Treasury OID: Ensure your state return reflects its exemption from state/local taxes.
Future Implications
OID reporting creates a basis adjustment in your investment. When you sell or redeem the obligation, you’ll need records of all previously reported OID to correctly calculate capital gain or loss.
High OID amounts or complex investments (like REMICs) may slightly increase audit scrutiny, but OID alone rarely triggers an audit.
FAQs
Do I Need to Report OID Even If I Didn't Receive Any Cash?
Yes. OID is taxable as it accrues each year, even though you won't receive the money until maturity. This “phantom income” is considered earned interest.
What's the Difference Between Form 1099-OID and Form 1099-INT?
Form 1099-INT reports regular interest paid on deposits and shorter-term obligations, while Form 1099-OID reports discount-based income from longer-term instruments.
I Bought a Discounted Bond Mid-Year. Why Does Box 1 Show a Full Year of OID?
It shouldn’t. You’re only responsible for OID during the time you owned the bond. Use Publication 1212 to find the daily accrual rate and calculate your prorated OID.
Can I Avoid Paying Tax on OID If I Reinvest It Automatically?
No. OID is taxable when it accrues, even if reinvested. It’s treated like reinvested dividends—you still owe tax.
What Should I Do If I Receive a Corrected Form 1099-OID?
Compare the corrected form to what you originally reported. If the change affects your taxable income, file Form 1040X to amend your return.
I'm a Nominee Holding Bonds for My Child. How Do I Handle Form 1099-OID?
File a nominee Form 1099-OID showing your child as the recipient. Submit it with Form 1096 and provide your child with Copy B. Only report your share of the OID on your own return.
The OID Amount Seems Too High. Is That Normal?
Possibly. Deep discount or zero-coupon bonds often have large OID accruals since they pay no periodic interest. Verify the amount using IRS Publication 1212.
Sources: Form 1099-OID (2012) and Instructions for Forms 1099-INT and 1099-OID (2012), available on IRS.gov.
