Non de minimus tax exempt discount bond call for Tax Planner?

tlbenning

Purchased a heavily discounted non-OID muni bond some years ago which was called recently at par (thank you, Meredith Whitney!). It was outside the de minimus range at purchase. So the increase in principal is ordinary income, not LTCG as Quicken wants to record it in Bonds Sold.

My brute force workaround:
1. Income transaction for the gain amount with Other Inc as the misc. category so it shows up as ordinary income in Tax Planner.
2. Return of Capital for the same amount.
3. Bonds Sold with the total price being the cost basis.
4. When I Reconcile at the end of the month, I'll let Quicken adjust the cash balance to remove the excess.

Is there a more elegant way to do this? I'll have some more coming up in the next couple of years.

Tom Young

Probably what you should have been doing all along, (I'm a little rusty here as it's been a long time since I've directly owned a bond), is amortizing the OID each year, adding that amount to the basis of the bond via negative RtrnCap transactions, and reporting the income.  That process would get your basis to the "correct" amount such that the sale would then calculate the capital gain properly.

Tom Young

So you might consider changing your first entry to a straight "IntInc" entry to recognize the income, make your negative RtrnCap entry in the same amount, and then sell the bond for the cash received.  That makes everything right for the Tax Report and eliminates the need to make a cash adjustment down the road.

q_lurker

My brute force workaround:
1. Income transaction for the gain amount with Other Inc as the misc. category so it shows up as ordinary income in Tax Planner.
2. Return of Capital for the same amount.
3. Bonds Sold with the total price being the cost basis.
4. When I Reconcile at the end of the month, I'll let Quicken adjust the cash balance to remove the excess.

I think this is all just reinforcing where you got with Tom, but I wanted to clarify a couple of points. 

1.  For the Income entry, you can put the dollar amount on the Miscellaneous line, and assign any category.  You are choosing "Other Inc" but you could choose "_IntInc" as well.  That selection would not get overridden by the tax free status of the security.  "_IntInc" is the normal category used for interest income in investment accounts.  You are correct to avoid using the Interest income field which would become an "_IntIncTaxFree" categorization.  The "_IntInc" entry would flow to a Schedule B tax line entry which may or may not be what you want.  Your choice.   

2.  Return of capital "for the same amount".  As a negative?  A normal (positive RtrnCap) decreases the cost basis of the security.  A negative RtrnCap increases the cost basis which is what you want to do, and what Tom is doing in his annual amortization.  A negative RtrnCap must be entered through the Enter Transactions button, not as an inline entry in the transaction list.

Those two entries should cancel each other out in terms of cash.  No step 4 should be necessary.

3.  If you have increased the cost basis of the bond to par value by a negative RtrnCap, selling it at cost is the same as at par is that same as real life.    

Rocket J Squirrel

I never studied Latin, and I don't understand why this is ordinary income. But as far as Quicken is concerned, I think you can do this with 2 transactions.

1. Income transaction as you say above to capture the ordinary income.
2. Bonds Sold with total price received being zero.

Tom Young

Probably what you should have been doing all along, (I'm a little rusty here as it's been a long time since I've directly owned a bond), is amortizing the OID each year, adding that amount to the basis of the bond via negative RtrnCap transactions, and reporting the income.  That process would get your basis to the "correct" amount such that the sale would then calculate the capital gain properly.

tlbenning

Yes, Tom, you're right, if I had elected to report the income annually it would have worked out in the manner you describe. It's an old non-covered bond so my broker hasn't reported any discount amortization all along. I elected to pay at the sale. Too be honest, I'm not even sure I understood the de minimus rule back then. One needs to nowadays - with interest rates rising, discount bonds are plentiful.

So in Step 2, I'll change the Return of Capital to a negative number and then Bond Sold at par. I don't need the Balance Adjustment step.

Thank you! I knew there was a more elegant solution.

Tom Young

So you might consider changing your first entry to a straight "IntInc" entry to recognize the income, make your negative RtrnCap entry in the same amount, and then sell the bond for the cash received.  That makes everything right for the Tax Report and eliminates the need to make a cash adjustment down the road.

tlbenning

It's a tax exempt bond so I thought with the Tax Free box checked in Security Details, Quicken wouldn't recognize IntInc as taxable. So I used Other Inc. Doesn't matter - I don't download to a tax prep program.

q_lurker

My brute force workaround:
1. Income transaction for the gain amount with Other Inc as the misc. category so it shows up as ordinary income in Tax Planner.
2. Return of Capital for the same amount.
3. Bonds Sold with the total price being the cost basis.
4. When I Reconcile at the end of the month, I'll let Quicken adjust the cash balance to remove the excess.

I think this is all just reinforcing where you got with Tom, but I wanted to clarify a couple of points. 

1.  For the Income entry, you can put the dollar amount on the Miscellaneous line, and assign any category.  You are choosing "Other Inc" but you could choose "_IntInc" as well.  That selection would not get overridden by the tax free status of the security.  "_IntInc" is the normal category used for interest income in investment accounts.  You are correct to avoid using the Interest income field which would become an "_IntIncTaxFree" categorization.  The "_IntInc" entry would flow to a Schedule B tax line entry which may or may not be what you want.  Your choice.   

2.  Return of capital "for the same amount".  As a negative?  A normal (positive RtrnCap) decreases the cost basis of the security.  A negative RtrnCap increases the cost basis which is what you want to do, and what Tom is doing in his annual amortization.  A negative RtrnCap must be entered through the Enter Transactions button, not as an inline entry in the transaction list.

Those two entries should cancel each other out in terms of cash.  No step 4 should be necessary.

3.  If you have increased the cost basis of the bond to par value by a negative RtrnCap, selling it at cost is the same as at par is that same as real life.    

tlbenning

Thank you, q. I did not know that IntInc in the Misc category would keep it taxable. Very interesting.

I had caught switching the RoC to a negative number in my edited response to Tom above at 1147.

I appreciate the assistance.