Municipal Bonds Called, bought at a Premium
RobertWit
In 1991 I bought a $5,000 Municpal bond for $5,543.
(It paid a couple of points over market rate.)
This last year it was called by the issuing agency,
and they paid $5,150. How do I treat this on my
Schedule D? Is this a capital loss?
I've gotten very nice (tax exempt) interest payments
over the years, which have justified the premium I
paid, but now that its liquidated, I'm not sure how
to handle it.
GEORGE GREEN
RobertWit <robe...@aol.com> wrote:
Robert:
Yes, you put it in Sched. D. It's a long term capital loss.
george in sunny san diego
Art Kamlet
RobertWit <robe...@aol.com> wrote:
> In 1991 I bought a $5,000 Municpal bond for $5,543.
> (It paid a couple of points over market rate.)
>
> This last year it was called by the issuing agency,
> and they paid $5,150. How do I treat this on my
> Schedule D? Is this a capital loss?
>
> I've gotten very nice (tax exempt) interest payments
> over the years, which have justified the premium I
> paid, but now that its liquidated, I'm not sure how
> to handle it.
The market price of a muni is usually geared to both
its coupon rate and its first call date, so you really
had the effective interest rate figured into your
purchase price. And it was called. Good for you.
In general, you cannot take this as a capital loss,
but should theoretically amortize that amount you
paid extra -- really an interest expense -- per year,
but since it is a muni, amortizing tax exempt
interest can't be done.
So ignore the "loss." It wasn't a taxable capital loss.
--
Art Kamlet Columbus, Ohio kam...@infinet.com
esk...@juno.com
robe...@aol.com (RobertWit) wrote:
> In 1991 I bought a $5,000 Municpal bond for $5,543.
> (It paid a couple of points over market rate.)
>
> This last year it was called by the issuing agency,
> and they paid $5,150. How do I treat this on my
> Schedule D? Is this a capital loss?
Contrary to the other advice you received, I believe
you cannot claim the capital loss.
The IRS requires you to "amortize the bond Premium".
That is report reduced interest each year, and then
not claim the loss. Of course, reduceing your
reported muni interest probably buys you nothing.
A rare taxpayer might have less of his SS taxed.
With taxable bonds, this treatment is optional, vs
claiming the capital loss of Sched. D. But with
muni's it is mandatory. They considered you to
have amortized the loss whether or not you did.
You might even owe a capital gain on the call premium.
ESK
TurboTax has clear instructions on this,
as does the IRS.
--
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tex...@aol.com
robe...@aol.com (RobertWit) writes:
> This last year it was called by the issuing agency,
> and they paid $5,150. How do I treat this on my
> Schedule D? Is this a capital loss?
Yes; sale price is less than your basis (purchase price)
Hank S
Tom Ostrand
kam...@infinet.com (Art Kamlet) writes:
> RobertWit <robe...@aol.com> wrote:
>> In 1991 I bought a $5,000 Municpal bond for $5,543.
>> (It paid a couple of points over market rate.)
>>
>> This last year it was called by the issuing agency,
>> and they paid $5,150. How do I treat this on my
>> Schedule D? Is this a capital loss?
> The market price of a muni is usually geared to both
> its coupon rate and its first call date, so you really
> had the effective interest rate figured into your
> purchase price. And it was called. Good for you.
> In general, you cannot take this as a capital loss,
> but should theoretically amortize that amount you
> paid extra -- really an interest expense -- per year,
> but since it is a muni, amortizing tax exempt
> interest can't be done.
> So ignore the "loss." It wasn't a taxable capital loss.
Art,
your advice is usually good, but this one isn't
correct. It is certainly a capital loss. It's no
different from buying stock for $5543, and later
selling it for $5150. The IRS doesn't have anything
to do with the effective market interest rate, or the
purchase price. Lots of stocks (utilities for example)
have their prices dependent on prevailing interest
rates, but that does not affect what you report as
your original cost and your selling price.
In the opposite direction, suppose you bought it
originally at a discount, because the face value of the
bond paid less than prevailing rate. When it matures
at face value, you have to report a capital gain.
Are you possibly confusing the premium ($543) he
originally paid with accrued interest?
--
Tom Ostrand E-mail: t...@scr.siemens.com
Siemens Corporate Research Phone: (+1) 609-734-6569
755 College Rd East FAX: (+1) 609-734-6565
Princeton, NJ 08540
Art Kamlet
Tom Ostrand <t...@scr.siemens.com> wrote:
> kam...@infinet.com (Art Kamlet) writes:
> your advice is usually good, but this one isn't
> correct. It is certainly a capital loss. It's no
> different from buying stock for $5543, and later
> selling it for $5150. The IRS doesn't have anything
> to do with the effective market interest rate, or the
> purchase price. Lots of stocks (utilities for example)
> have their prices dependent on prevailing interest
> rates, but that does not affect what you report as
> your original cost and your selling price.
I think you are using logic, when the code overrides it:^)
I may have been too aggressive trying to explain the
logic for this rule, but the bottom line is when you
buy a muni bond at a premium and it is called or
otherwise redeemed (or sold, but that's more complex)
you must amortize the premium over the life until the
first call date. But you cannot then claim that
amortized amount as it is tax exempt. (You can if
you bought after the IPO or sold before first call
date, but I have never tried to work out that
calculation.) Another poster noted it could affect the
amount of tax exempt interest you report and so affect
social security taxable calculations. I'd add if it is
an AMT bond the annual amortized portion could affect
AMT.
With taxable bonds you have a choice: You can amortize
annually or you can take the capital loss when
redeemed. For munis you must amortize. See IRS Pub
550, for example.
> In the opposite direction, suppose you bought it
> originally at a discount, because the face value of the
> bond paid less than prevailing rate. When it matures
> at face value, you have to report a capital gain.
Of course. What else is new?
> Are you possibly confusing the premium ($543) he
> originally paid with accrued interest?
Of course not. Accrued interest on munis is deducted
from the line 8b (tax exempt interest) and if AMT,
from the AMT amount.
Mark Castellucci, CPA
>>> In 1991 I bought a $5,000 Municpal bond for $5,543.
>>> (It paid a couple of points over market rate.)
>>>
>>> This last year it was called by the issuing agency,
>>> and they paid $5,150. How do I treat this on my
>>> Schedule D? Is this a capital loss?
>> The market price of a muni is usually geared to both
>> its coupon rate and its first call date, so you really
>> had the effective interest rate figured into your
>> purchase price. And it was called. Good for you.
>> In general, you cannot take this as a capital loss,
>> but should theoretically amortize that amount you
>> paid extra -- really an interest expense -- per year,
>> but since it is a muni, amortizing tax exempt
>> interest can't be done.
>> So ignore the "loss." It wasn't a taxable capital loss.
> your advice is usually good, but this one isn't
> correct. It is certainly a capital loss. It's no
> different from buying stock for $5543, and later
> selling it for $5150. The IRS doesn't have anything
> to do with the effective market interest rate, or the
> purchase price. Lots of stocks (utilities for example)
> have their prices dependent on prevailing interest
> rates, but that does not affect what you report as
> your original cost and your selling price.
> In the opposite direction, suppose you bought it
> originally at a discount, because the face value of the
> bond paid less than prevailing rate. When it matures
> at face value, you have to report a capital gain.
> Are you possibly confusing the premium ($543) he
> originally paid with accrued interest?
Art was correct. The situation here is quite different
from the purchase and sale of stock. See other posts
in this thread regarding amortization of bond premium;
they are correct.
Mark Castellucci, CPA
c...@davis.com
Davis, CA
---------------------------------------------------------------------------------------
Any opinion expressed herein is personal and is not intended
as professional advice. Tax issues can be complicated and
are subject to many "exceptions." Obtain professional advice
to properly examine your specific situation.
---------------------------------------------------------------------------------------
Mark Castellucci, CPA
tex...@aol.com wrote:
> robe...@aol.com (RobertWit) writes:
>> This last year it was called by the issuing agency,
>> and they paid $5,150. How do I treat this on my
>> Schedule D? Is this a capital loss?
> Yes; sale price is less than your basis (purchase price)
Not true. His basis is the purchase price less
amortized bond premium. The loss is zero.
Bruce E. Cobern
esk...@juno.com wrote:
> Contrary to the other advice you received, I believe
> you cannot claim the capital loss.
I probably agree with you. See below.
> The IRS requires you to "amortize the bond Premium".
> That is report reduced interest each year, and then
> not claim the loss. Of course, reducing your
> reported muni interest probably buys you nothing.
> A rare taxpayer might have less of his SS taxed.
> With taxable bonds, this treatment is optional, vs
> claiming the capital loss of Sched. D. But with
> muni's it is mandatory. They considered you to
> have amortized the loss whether or not you did.
> You might even owe a capital gain on the call premium.
I think one piece of information which has not been
given is whether the call was a scheduled call or not.
As I understand the amortization rules they require
that the premium be amortized to the call value on the
date of the first scheduled call. Thus, if this was
the first scheduled call and was stated to be at $5150,
then at the time of the call the premium would have
been amortized so that the basis on call equaled the
call price. If the bond were not called then the
premium amortization would be adjusted so that the rate
of amortization would be such that the premium would be
amortized to the next scheduled call price at that call
date, etc.
If this was an unscheduled call then the amortized
premium (assuming, for example amortization to par at
maturity) would almost certainly yield a basis which
is different from the call price and that difference
would yield a capital gain or loss.
---
Bruce E. Cobern, CPA
mailto:bec@p
EDWARD K. ZOLLARS
t...@scr.siemens.com (Tom Ostrand) says:
> your advice is usually good, but this one isn't
> correct. It is certainly a capital loss.
Unfortunately, Art is right in this case. A municipal
bond sold at a premium has the premium "amortized" over
a period ending with the first call date for the bond.
Art gave the theoretical reasons for this, but the real
reason why it's not a capital loss is because that's
the way the law works.
--
Ed Zollars, CPA Phoenix, Arizona
ezol...@aztec.asu.edu, ezo...@primenet.com
Harriso144
The premium paid for the municipal bond must be
amortized (sec.1016(a)(5)) and basis correspndingly
reduced. I do not have my copy at hand and thus cannot
cite accurately, but the proposed regs (issued last
year) under sec.171 provide the rules for premium
amortization. Without knowing the terms of the bond in
question, I can't calculate the basis at the time of
redemption. There could be a capital gain or loss
depending on the adjustments to basis while the bond
was held.
Greg Sopin
Mark Castellucci, CPA <c...@davis.com> wrote:
> Art was correct. The situation here is quite different
> from the purchase and sale of stock. See other posts
> in this thread regarding amortization of bond premium;
> they are correct.
I agree. Art gets my vote. If it was as simple
as Tom suggests, I wouldn't get such a splitting
headache whenever I see one of these. <g>
- Greg Sopin
Tom Ostrand
My previous answer to the original question is wrong.
As Art Kamlet and another poster correctly stated, for
a muni bond bought at a premium, you can amortize the
premium amount over the life of the bond against the
interest earned by the bond, but you can't claim a loss
against the final sale or redemption value. Of course,
amortizing against tax-exempt interest doesn't do you
any good on your Federal return.
Check Pub. 550 for details.
My apologies to Art.
t...@scr.siemens.com (Tom Ostrand) writes:
>> RobertWit <robe...@aol.com> wrote:
>>> In 1991 I bought a $5,000 Municpal bond for $5,543.
>>> (It paid a couple of points over market rate.)
>>>
>>> This last year it was called by the issuing agency,
>>> and they paid $5,150. How do I treat this on my
>>> Schedule D? Is this a capital loss?
> Art,
> your advice is usually good, but this one isn't
> correct. It is certainly a capital loss. It's no
> different from buying stock for $5543, and later
> selling it for $5150. The IRS doesn't have anything
> --
> Tom Ostrand
MLMurrell
tex...@aol.com writes:
>> This last year it was called by the issuing agency,
>> and they paid $5,150. How do I treat this on my
>> Schedule D? Is this a capital loss?
> Yes; sale price is less than your basis (purchase price)
I'm not sure.....This is a bond, bought at a premium.
I would say that the holder should have been
amortizing the bond premium over the life of the bond.
The "book value" of the bond would be compared to the
"Call Price" to determine any gain or loss. AND this
is a tax free bond....ie, Do you think we could buy
tax free bonds, hold on to them as they pay us tax
free interest, and then years later redeam them at
face and claim a tax loss!!! I don't think so!
The premium the taxpayer paid, was in essentially
prepaid interest, and should be amortized as such.
If this bond was fully amortized, the bond was
actually sold at a gain... ie the call premium of
$150.
Stephen P. Pope
I am curious about a related issue:
Suppose one owns a tax-free municipal bond fund. Each
year the fund reports the amount of tax-free interest
earned (which is not taxable, but reported on the first
page of form 1040); and also the capital gain realized
from trading internal to the fund.
It is my assumption that these capital gains are
reportable and taxable each year; and that they further
subtract from the eventual capital gain realized when
the fund is eventually sold.
But based on this thread it appears the above is true
only if the gains resulted from market-price movements
rather than original discounts. Is this true, and if
so does one NOT pay tax on some fraction of the
reported capital gains each year? And how is this
fraction determined?
Thanks -
Steve
EDWARD K. ZOLLARS
s...@rahul.net ("Stephen P. Pope") says:
> But based on this thread it appears the above is true
> only if the gains resulted from market-price movements
> rather than original discounts. Is this true, and if
> so does one NOT pay tax on some fraction of the
> reported capital gains each year? And how is this
> fraction determined?
No, the fund family will have reported the "proper"
capital gain on their 1099. Or, to put it more
correctly, we hope they have reported it correctly
<grin> when they prepared the 1099's. The rules for
what's a capital gain distribution from a mutual fund
are a bit involved, but the funds themselves take care
of computing that amount.
Bruce E. Cobern
>> But based on this thread it appears the above is true
>> only if the gains resulted from market-price movements
>> rather than original discounts. Is this true, and if
>> so does one NOT pay tax on some fraction of the
>> reported capital gains each year? And how is this
>> fraction determined?
> No, the fund family will have reported the "proper"
> capital gain on their 1099. Or, to put it more
> correctly, we hope they have reported it correctly
> <grin> when they prepared the 1099's. The rules for
> what's a capital gain distribution from a mutual fund
> are a bit involved, but the funds themselves take care
> of computing that amount.
And one would also hope that the funds would properly
compute any amortization of discount or premium on the
bonds before reporting the gains.
On a related note, there was a change in the law this
past year that prevents you from converting either
exempt interest distributions or capital gains
distributions into short term capital losses.
Previously, you could "buy a dividend" from a mutual
fund by purchasing before the dividend date. After the
dividend the value of the decreases by approximately
the amount of the dividend.
One strategy was to buy a mutual fund just before it
declared either a capital gain dividend or an exempt
interest dividend. This gave you either long term gain
or tax free income. You could then sell the fund and
take a short term capital loss. This effectively
converted gave a short term loss to offset against
short term gains, offset by either tax free income or
long term capital gain. In either case, there could be
a tax benefit of the transaction.
Well, one of the several bills passed last summer, and
I'm not sure which one, put an end to that, under
certain circumstances. If you sell any mutual fund
share you have held less than SIX MONTHS (note, this is
NOT a one year holding period) and you have received a
cg distribution on that share, then the loss is
reclassified as long term. If you had received an
exempt interest dividend on that share during the
period you held it, then the loss is disallowed. I do
not recall, here at home, the code section, but I have
it with my personal tax stuff at the office since it
applies to me this year, inadvertently.
BTW: During the course of the whole tax season, the
ONLY mutual fund family that I saw make specific
reference to this position in reporting gains or losses
on sales of funds was Twentieth Century, now American
Century. I'm sure there were others, but 20th was the
only one where I noticed it while reviewing returns.
Just another little wrinkle that I thought I would
mention, even though it is after the 15th.
---
Bruce E. Cobern, CPA
mailto:b...@pipeline.com
Rich Carreiro
t...@scr.siemens.com (Tom Ostrand) writes:
> your advice is usually good, but this one isn't
> correct. It is certainly a capital loss. It's no
> different from buying stock for $5543, and later
> selling it for $5150. The IRS doesn't have anything
> to do with the effective market interest rate, or the
> purchase price. Lots of stocks (utilities for example)
Except that the IRS does. The IRS has decreed that if
the premium or discount on a bond exceeds a certain
amount, you cannot ignore the discount or premium, but
instead must amortize it, which will have the effect
of increasing your basis (in the case of an accreted
discount) or decreasing the amount of interest you
report each year (in the case of an amortized premium).
> have their prices dependent on prevailing interest
> rates, but that does not affect what you report as
> your original cost and your selling price.
Not at all true, especially in the case of discounts
from face value. See IRS Pub 1212 "Original Issue
Discount Instruments."
> In the opposite direction, suppose you bought it
> originally at a discount, because the face value of the
> bond paid less than prevailing rate. When it matures
> at face value, you have to report a capital gain.
That is not necessarily true. If the bond (muni or
not) was bought recently enough and the discount is
more than 0.25% * face value, then the OID rules come
into effect and one must calculate the OID and add it
to the basis of the bond (and pay tax on it, if the
bond is not tax-exempt). If the bond is held to
maturity, there will be neither a capital gain nor a
capital loss (since the OID accretion has eliminated
the discount and brought the basis equal to face
value). If sold before maturity, there could be either
a capital gain or loss.
--
Rich Carreiro
rlc...@animato.pn.com
P5-100/RedHat Linux 4.1
Lester M. Levy, MD
Mark Castellucci, CPA wrote:
> tex...@aol.com wrote:
>> robe...@aol.com (RobertWit) writes:
>>> This last year it was called by the issuing agency,
>>> and they paid $5,150. How do I treat this on my
>>> Schedule D? Is this a capital loss?
>> Yes; sale price is less than your basis (purchase price)
> Not true. His basis is the purchase price less
> amortized bond premium. The loss is zero.
My question is how do you treat the one or two percent premium over face
value that you get when a tax-exempt bond is called? Assuming the
original bond was purchased for $5000 plus a premium to be amortized as
tax-exempt equivalent plus an amount of accrued interest which was
tax-exempt.. the basis is $5000. The call is for $5150, so there is a
capital gain of $150? (Not a tax pro.)
--
-Lester M. Levy, MD ll...@hoflink.com
Bruce E. Cobern
"Lester M. Levy, MD" <ll...@hoflink.com> wrote:
> My question is how do you treat the one or two percent premium over face
> value that you get when a tax-exempt bond is called? Assuming the
> original bond was purchased for $5000 plus a premium to be amortized as
> tax-exempt equivalent plus an amount of accrued interest which was
> tax-exempt.. the basis is $5000. The call is for $5150, so there is a
> capital gain of $150? (Not a tax pro.)
The ultimate amortization is to face value at maturity.
If there are no specified call dates and values then if
the bond is prematurely called the basis will be the
amortized basis and you will have a gain/loss as
compared to the call price.
If, however, the call was at a predetermined date/price
then the amortization of the premium is to THAT PRICE
as of THAT CALL DATE and there is no gain or loss on
call. If the bond is not called, then the amortization
continues, now to the NEXT call date/price. Ultimately
if the bond is not called the amortization still takes
you to face at maturity.
It is NOT automatic that there is never a gain or loss
on the call of a municipal bond.
Edward Zollars
"Lester M. Levy, MD" <ll...@hoflink.com> wrote:
> My question is how do you treat the one or two percent premium over face
> value that you get when a tax-exempt bond is called? Assuming the
> original bond was purchased for $5000 plus a premium to be amortized as
> tax-exempt equivalent plus an amount of accrued interest which was
> tax-exempt.. the basis is $5000. The call is for $5150, so there is a
> capital gain of $150? (Not a tax pro.)
My "first blush" run at that one is that if the bond
required that a premium be paid if called at some date,
you would only amortize the premium down to that level
by that date. If you had bought the bond at a price
below the call amount, there would be a capital gain if
the call option was exercised.
---
Ed Zollars, CPA Phoenix, AZ
ezo...@primenet.com
http://www.getnet.com/~hmtzcpas
Art Kamlet
Bruce E. Cobern <b...@pipeline.com> wrote:
>> On a related note, there was a change in the law this
>> past year that prevents you from converting either
>> exempt interest distributions or capital gains
>> distributions into short term capital losses.
>> Previously, you could "buy a dividend" from a mutual
>> fund by purchasing before the dividend date. After the
>> dividend the value of the decreases by approximately
>> the amount of the dividend.
...
> Well, one of the several bills passed last summer, and
> I'm not sure which one, put an end to that, under
> certain circumstances. If you sell any mutual fund
> share you have held less than SIX MONTHS (note, this is
> NOT a one year holding period) and you have received a
> cg distribution on that share, then the loss is
> reclassified as long term.
Bruce,
You have the right idea, but are quite a few years too
late.
The earliest Pub 550 in my file is for tax year 1993,
and is not indicated new for '93 so must have applied
at least to '92, if not even earlier.
In Chapter 1, (Pub 550 for 1993)
Investment Income
Capital Gains Distributions
Regulated Investment Companies and Mutual Funds
Loss on Sale of Stock
"If you received, or were considered to have
received, capital gain distributions on mutual
fund stock that you held for 6 months or less and
sold at a loss, you must report as a long-term
capital loss the part of the loss that is equal
to, or less than, the capital gain distribution.
This rule does not apply to losses incurred under
a periodic liquidation plan."
Art Kamlet
Lester M. Levy, MD <ll...@hoflink.com> wrote:
> My question is how do you treat the one or two percent premium over face
> value that you get when a tax-exempt bond is called? Assuming the
> original bond was purchased for $5000 plus a premium to be amortized as
> tax-exempt equivalent plus an amount of accrued interest which was
> tax-exempt.. the basis is $5000. The call is for $5150, so there is a
> capital gain of $150? (Not a tax pro.)
The premium which is to be amortized is the premium
paid above first call date and price. So in this case
there is no loss to consider, since the amortization
does not come into play when you pay less than 5200.
And since you paid 5150 and got 5200 the capital gain
is $50. (However, I have discussed this with several
others who disagree and say there is no CG at all.
Therefore, I will modify that last statement to say I
think the CG is $50 but am very willing to be talked
out of it:^)
William Petrie
"Lester M. Levy, MD" <ll...@hoflink.com> wrote:
> My question is how do you treat the one or two percent premium over face
> value that you get when a tax-exempt bond is called? Assuming the
> original bond was purchased for $5000 plus a premium to be amortized as
> tax-exempt equivalent plus an amount of accrued interest which was
> tax-exempt.. the basis is $5000. The call is for $5150, so there is a
> capital gain of $150? (Not a tax pro.)
If a bond has a call date/amount, you amortize the
premium to that amount and date ignoring par. If it's
called on schedule and at the indicated price, you
break even. If they don't call it, you begin a second
amortization to par with the terminal date of the bond
as the end of the amortization period.
Assume you buy a bond for 10300 thats callable in 5
years at 102. The bond period ends in 10 years at par.
Your amorizable premium is $100 for the first
amortization. (10300-10200). If the bond is called
after 5 years, your basis is 10200 and the proceeds are
10200. If it's not called you amortize the remaining
200 so that the basis in another five years is 10000.
As a note in passing, the amortization of the premium
has no other tax affect such as you could get with a
taxable bond.
Bill
Art Kamlet
<tex...@aol.com> wrote:
>> This last year it was called by the issuing agency,
>> and they paid $5,150. How do I treat this on my
>> Schedule D? Is this a capital loss?
> Yes; sale price is less than your basis (purchase price)
These are munis. The IRS requires when you buy munis
at a premium, that you effectively amortize them over
the period to first call date at the first call date
price. The practical effect of requiring you to
amortize munis, is you get virtually no benefit of
the loss -- and in particular you do not get to claim
a capital loss on schedule D. (You might reduce some
AMT amounts, and reduce some lone 8a amounts and thus
reduce taxable amount of social security -- but this
is not the typical case.)
Bruce E. Cobern
>>> On a related note, there was a change in the law this
>>> past year that prevents you from converting either
>>> exempt interest distributions or capital gains
>>> distributions into short term capital losses.
>>> Previously, you could "buy a dividend" from a mutual
>>> fund by purchasing before the dividend date. After the
>>> dividend the value of the decreases by approximately
>>> the amount of the dividend.
>> Well, one of the several bills passed last summer, and
>> I'm not sure which one, put an end to that, under
>> certain circumstances. If you sell any mutual fund
>> share you have held less than SIX MONTHS (note, this is
>> NOT a one year holding period) and you have received a
>> cg distribution on that share, then the loss is
>> reclassified as long term.
> You have the right idea, but are quite a few years too
> late.
> The earliest Pub 550 in my file is for tax year 1993,
> and is not indicated new for '93 so must have applied
> at least to '92, if not even earlier.
You may be right, but I recall the note on American
Century statements indicating that this was new
legislation. Could it be that applying this to
disallow the loss on muni funds where there has been
an exempt interest dividend is new? I'll have to
find the section and check the history.
Thanks for the comments.
Art Kamlet
William Petrie <wpe...@southeast.net> wrote:
> As a note in passing, the amortization of the premium
> has no other tax affect such as you could get with a
> taxable bond.
I believe there are two potential tax effects of
amortizing munis, neither of which is usually
significant:
- reducing the net tax exemot interest for line 8A,
thereby potentialy lessening the social security
taxable percentage
- if the muni is subject to AMT, reducing the
reportable tax exempt interest for AMT
(I won't even look at EIC effects:-)
J. Andrew Lipscomb
esk...@juno.com wrote:
> robe...@aol.com (RobertWit) wrote:
>> In 1991 I bought a $5,000 Municpal bond for $5,543.
>> (It paid a couple of points over market rate.)
>>
>> This last year it was called by the issuing agency,
>> and they paid $5,150. How do I treat this on my
>> Schedule D? Is this a capital loss?
> Contrary to the other advice you received, I believe
> you cannot claim the capital loss.
>
> The IRS requires you to "amortize the bond Premium".
> That is report reduced interest each year, and then
> not claim the loss. Of course, reduceing your
> reported muni interest probably buys you nothing.
> A rare taxpayer might have less of his SS taxed.
> With taxable bonds, this treatment is optional, vs
> claiming the capital loss of Sched. D. But with
> muni's it is mandatory. They considered you to
> have amortized the loss whether or not you did.
> You might even owe a capital gain on the call premium.
Also, the amortization will reduce your state-taxable
interest if the bond was issued outside your home state
(Tennessee is an exception to that rule).
J. Andrew Lipscomb <ew...@chattanooga.net, them...@delphi.com>
PGP keys by request
TexTax
kam...@infinet.com (Art Kamlet) writes:
> These are munis. The IRS requires when you buy munis
> at a premium, that you effectively amortize them over
> the period to first call date at the first call date
> price. The practical effect of requiring you to
> amortize munis, is you get virtually no benefit of
> the loss -- and in particular you do not get to claim
> a capital loss on schedule D. (You might reduce some
> AMT amounts, and reduce some lone 8a amounts and thus
> reduce taxable amount of social security -- but this
> is not the typical case.)
I relearned something that I should have remembered. Thanks
Hank S
Art Kamlet
Tom Ostrand <t...@scr.siemens.com> wrote:
> My previous answer to the original question is wrong.
> My apologies to Art.
Accepted, but no big deal. The code is so complex
no one knows it all, and it certainly is not always
sensible or rational.