TIPS Question

[DavidJ]

Good morning!

In 2008, I bought my first TIPS. I therefore just got my first 1099-OID relating to a TIPS. Because of the plagues which befell the financial system in 2008, the value for "Original issue discount..." is negative.

In case anyone wants to give me examples, the actual numbers are:
Par amount = $18200.00
OID = $212.76

I understand that in order to keep the current face value and the calculations deriving from it correct, I am going to have to enter the $212.76 into my FM9.3 somehow.

Please explain to me how I enter the $212.76, and how I would keep the face value of the TIPS updated in the more normal case where inflation and thus OID are positive.

Thanks.
David.

[Mark]

Hi DavidJ,

I'm not certain of the tax implications of buying these bonds, but I can help with the specifics of how to record it if you can tell me the following:

1) What were the actual details of the transaction? How much did you pay out of pocket, etc.

2) What do you want your tax cost basis to be? Does this OID affect your tax cost basis, or is it considered some form of interest?

[DavidJ]

Now that I think about it, all that I really need to calculate by myself is the cost basis. As far as I can tell, the OID is treated as interest - like the 'phantom interest' on a zero-coupon bond - if it's positive, and is ignored by the IRS if it's negative. (My source is http://www.treasurydirect.gov/forms/sec0011.pdf ) . If so, I would guess that my cost basis should be my out-of-pocket cost.

The actual transaction is as follows:

I bought bonds with a face value of $18200 for a total out-of-pocket cost of $16818.42, at a price of 92.380436. The 'missing' $5.180648 was accrued interest. Wouldn't it would be best to use $16818.42 as the cost basis, which I assume that FM will do by default?

If so, I won't record the OID anywhere in FM, and will just pass it on to my accountant for entry into the tax forms.

As for the future changes in principal, if they're large enough to be worth recording, couldn't I just use the Treasury Dept. tables to compute the new face value, and enter it manually into FM as a price change?

Thanks.
David.

[Mark]

Hi David,

Fund Manager will record by default however it comes down from your broker, or however you enter it. You can double check the transaction details by going into the Data Register and using "Investments (all)" data type. The tax cost basis is simply the value of this purchase.

Yes, to update the market value of your investment, just record an updated closing price.