buying bonds above par; maturity

Capital loss, schedule d.

ChEAr$, Harlan Lunsford, EA n LA

so, is that limited to $3,000 beyond capital gains? So, if I already have a bunch of capital losses I am carrying forward, not a good idea to buy above par?

OTOH, if the bond's interest is tax-exempt -- if it's a municipal bond -- then there's no capital loss to report. The "loss" gets eaten up by amortization; there's no tax benefit at maturity. Reference: IRS pub 550...

"If the bond yields tax-exempt interest, you must amortize the premium. ... each year you must reduce your basis in the bond ... by the amortization for the year."

[The "premium" is the extra $5 you paid.]

The loss on a taxable premium bond should have been amortized over the life of the bond, leaving the basis of the bond when redeemed, PAR. So you have no loss this year. Sorry. Look at publication 550 to see what you might do, but it is NOT a LTCL. If it was a tax free bond, it's still PAR but you coundn't have gotten any dedcution over the years. See Pub 550.

DON"t buy premium tax frees.

Thanks. Pub 550 says for taxable bonds you can elect to amortize the premium (so I guess if you don't elect this, it is LTCL); it says for tax-exempts, you MUST amortize the premium.

In article , Gil Faver tax-exempts, you MUST amortize the premium.

How is the amortization shown? As a reduction of Schedule B interest? If a muni bond, reduction of line 8b?

Not on a 4797 I hope?

Yes: "ABP Adjustment," one negative number, for all bonds combined, in a line at the end of Schedule B.

Presumably, yes. But (IMO) line 8b almost never affects the tax due, so one might argue it's pointless to do the amortization calculation unless the bond is sold before maturity (in which case, amortization reduces the basis but not all the way to the face value, and there may be a capital gain or loss).

(Disclaimer: I'm not a tax pro.)

But when you hold a bond till maturity, does the 1099-B show the proceeds? Say you bought 10 bonds with a face value of 10k and held them to maturity. Does the 1099-B show proceeds of 10k? I don't remember mines showing it.

First, an apology. I cn't believe I was awake when I posted that. Ignore it.

To go on, however, i fyou don't amortize the loss is LTCL at maturity. If you DO amortize read the instructions in PUB 550 which, esentially, subtrats it from current income (which is a better deal than the LTCL at maturity. Note it is a "all bonds" and "forever" choice.. Yo ur1099 B will show total proceeds, so you show basis of Zero if you amortized, or $105 if not.

Do not adjust line 8b when amortizing a tax free bond premium, just reduce your basis, and don't bother ir you don't sell before maturity, which is important if you are drawing Social Security and have some other esoteric problems.

ed

...

I though only the premium ($5) was amortized, so basis would be face value if held to redemption.

Why not reduce line 8b?

I believe it could be either LTCG or STCG, depending on how long the bond was held. (With the interest rates these days, lots of people are buying short-term paper.)

But according to IRS publication 550:

"You can change your decision to amortize bond premium only with the written approval of the IRS. To request approval, use Form 3115, Application for Change in Accounting Method."

I?m thinking of doing this. Anybody have advice?

Amortizing has two advantages: (1) get the benefit sooner rather than later, and (2) offset ordinary income rather than LTCG (if held more than a year). But I've found the record-keeping to be burdensome. So I'm thinking of switching back. To keep it simple, I'd switch at a time when there are no amortizing taxable bonds in the portfolio.

Have any of you out there done this, or know about somebody who has?

Are there any downsides other than losing the two advantages? How does the IRS typically respond to requests like this? Would it tend to draw an (eek!) audit?

I'm guessing you mean "basis of $100" so the gain is Zero.

Figuring out the amortization numbers would be hard for me, so that would be a disadvantage. Now if there were a bond tracking program that was expert at doing this, that would be interesting.

One possibility if you have Excel:

The tricky part is determining the "effective rate." You can use Excel's "Goal Seek" to make the final "carrying amount" equal to the "face value" by changing the "effective rate."

Line 8b (tax-exempt interest) affects the taxable portion of social security. Maybe it affects other things too, even those not tax related such as qualification for federal college loans.

It affects EIC (counts as investment income.) It also could cause Medicare Premiums to increase.