If you received a Form 1099–INT that reflects accrued interest paid on a bond you bought between in-terest payment dates, include the full amount shown as interest on the Form 1099–INT on line 1, Part I of Schedule B (Form 1040).

   How do you know if or what the amount of the "accrued interest is?"  Look at the statement from you broker/dealer (that is the financial services firm selling you the bonds).  You will need to look at all the pages, look for the following terms (the page may be labeld Year End Summary; 1099-B Proceeds from Broker and Barter Exchange Transactions; or perhaps other terms that would be similar).  You will then look for "Details of Accrued Income ..."; "Accrued Interest Received"; "Accrued Interest Paid", or other similar terms.  If you do not see any dollar amounts or you did not buy or sell any bonds in the year, then no adjustment is required to the current interest income.  Be certain that you treat the basis correctly for accrued interest and retain the recordkeeping, you will need it should you sell the bond, should it be called or should it mature.

Then, below a subtotal of all interest income listed, write "Accrued Interest" and the amount of accrued interest. Subtract that amount from the interest income subtotal.

Enter the result on line 2 and also on Form 1040, line 8a.

By subtracting the income, you will not be requried to pay income tax on the interest income.   Furthermore, if you sell a tax-exempt bond with accrued interest, then you will add the interest to the tax-basis of the bond and you will not be taxed on that portion (the interest portion) of the sale of the bond.