Municipal Bond Forum
Accounting for a premium
Q
I understand the point you made in your article, “The Smart Buy in Today’s Market,” comparing a premium municipal bond yield to a new bond selling at par yield. How does the IRS require that I account for a premium on my tax return?
A
James A. Klotz responds:
The bond premium must be amortized. There is no tax loss at maturity, since the bonds maturing at par was the assumption at the time of purchase. There can, however, be a gain or loss based on the amortized value if sold prior to maturity.
This is a conceptual explanation of premium bond taxation. Keep in mind that we are municipal bond specialists, not accountants. It is important to consult your tax professional for any specific application.
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