How to calculate tax on zero coupon bonds

Question

My father bought what I thought were tax free bonds for my daughter in

1990. The bonds matured in 2007. He bought "65,000 California Zero CPN
10-1-07 (Cpn eagles II) Ser 6 OAR 7%, Orig 10% 4-1-10 Book Entry, MTY value $1000 per 1M-G.0. Yld to mat 7.00. No periodic payment." He paid $19,649.55 for the bonds. They matured at $65,000. We do not live in California, if that makes a difference. Do I owe taxes on the difference between 65,000 and 19,649.55, or is there more to it? We have not paid any taxes in any year on these bonds. Thank you very much for any help.

Arthur Kamlet · Accepted Answer

Every year the bond owner was supposed to know the tax exempt interest accrued for that bond, and do two things:

i) enter that interest on Form 1040 Line 8b, and

ii) add that interest to the cost basis of the bond.

If the bond was bought as an Initial Public Offerring, the original cost plus all the accrued interest until maturity should equal the redemption amount. That means no gain or loss.

You said your father paid for the bonds, and you want to know if you owe? How did you get involved?

And if your state has an income tax, chances are they tax California muni bond interest.

Edward · Answer

My father gave the bonds to my daughter when she was one year old under the uniform gifts to minors act. I am the custodian.

I received a 1099 every year, with "no information to report" on the

1099-div, 1099-int, and 1099-b.

Thanks again for any help.

MyVeryOwnSelf · Answer

In my only-partially-informed opinion, it's unlikely that an error on Form 1040 Line 8b affects the tax due. Before panicking, check if it does for you.

How to calculate tax on zero coupon bonds

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