Taxation of Municipal Bonds

I find this topic to be very confusing and I get lost quickly in the jargon. Is there a web site with a calculator that lets you enter all the relevant information so that you can determine the cost basis of a municipal bond that has matured?

As an example, I bought a pre-refunded muni bond (pre-refunded at

101.000) at premium a few years ago. Say the face value was 25,000 and I paid 27,000 and the proceeds last year were 25,250. If I just fill in the schedule D boxes with 27,000 as the cost and 25,250 as the sale price, it would generate a capital loss. But I know, or rather I believe, that you don't get a capital loss in such a case. So do I just put 25,250 as the cost?

Thanks.

Reply to
pixel_a_ted
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No capital loss in this case. When a muni-bond is bought at a premium, the premium MUST be amortized over the time you've held the bond, so the basis will be the value it was called at, with no gain or loss.

Reply to
Stan K

Thanks for that information. If I may, a couple of other cases this time involving inherited bonds, the question being whether this makes a difference as to how the gain/loss is treated:

  1. Taxable (Freddie) bond bought by mother at par. At the time it was inherited by me, it's value had dropped below par presumably because interest rates had risen. Bond was called last year at par. I pay capital gains on the difference of the stepped-up value and the redemption value, or do I have a choice to use the original value?

  1. Muni bond bought by mother at par. At time of inheritance, it values had increased above par. Bond was redeemed last year (got a long letter about defeasement or something like that - had no idea what they were talking about) basically at par, actually a small amount above. So no capital gains loss here either?

Thanks again.

Reply to
pixel_a_ted

With taxable bonds you have a choice to amortize or not. To make the election you must attach a statement to your return that you are amortizing under section 171, and once you make the election (and I image once you make the non-election) you cannot revoke it unless the IRS approves, and the rule applies to all your taxable bonds. I suppose If there is no election, the default behavior is to not amortize, which means your capital gain is the difference between redemption value and value at inheritance. If the bonds were given as a gift, the capital gain may be different.

Muni bonds must be amortized. So there is a capital loss equal to your commissions if you hold to maturity or call date.

See publication 550 for details.

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removeps-groups

| Muni bonds must be amortized. So there is a capital loss equal to | your commissions if you hold to maturity or call date.

Which commissions are you referring to here?

Dan Lanciani ddl@danlan.*com

Reply to
Dan Lanciani

Commissions when you buy and sell. When you hold to maturity or recall, there are normally no commissions, but you never know. When you buy there may be commissions, although ETrade doesn't have any if you buy a sufficient number of bonds.

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removeps-groups

In article , snipped-for-privacy@yahoo.com ( snipped-for-privacy@yahoo.com) writes: | On Feb 18, 8:25 pm, ddl@danlan.*com (Dan Lanciani) wrote: | > In article , snipped-for-privacy@yahoo.com ( snipped-for-privacy@yahoo.com) writes: | | > | Muni bonds must be amortized. So there is a capital loss equal to | > | your commissions if you hold to maturity or call date. | >

| > Which commissions are you referring to here? | | Commissions when you buy and sell. When you hold to maturity or | recall, there are normally no commissions, but you never know. When | you buy there may be commissions, although ETrade doesn't have any if | you buy a sufficient number of bonds.

So if I buy a bond at par but pay a commission are you saying that that commission does not constitute a premium which must be amortized? I ask because the definition of premium in the pubs makes it sound like you have to consider the total basis immediately after purchase, and that would typically include the commission.

Dan Lanciani ddl@danlan.*com

Reply to
Dan Lanciani

Sorry, I don't know if my statement is correct or not. Looked through publication 550, but couldn't tell.

The answer at

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says thatthe commission must be amortized. It makes sense because if there isno commission charge when you buy a bond, the brokerage is making thecommission on the bid-ask spread, and you amortize the price you paidfor the bond (which is the ask-price), so if they have a smaller askprice and a commission, then you should amortize the commission.OTOH, I can come up with a logical explanation for the other point ofview too.

And what if there was a bond reorganization charge? Stocks have this sometimes, like when there a reverse split, name change, etc. So maybe bonds can have it too. In this case do you add the charge to your cost basis and start amortizing it too? That doesn't make sense because it would mean that when you hold the bond to maturity, the capital gain is zero, and you essentially did not get to write off the reorganization charge (if you can add it to your cost basis and not amortize it, then you get a loss equal to the reorganization charge, and the loss is like a deduction of sorts).

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removeps-groups

Related question: For a New York return where there is non New York, Muni Bond interest and a bond premium, whould the accretion or Loss be deductable adjustment on the NY return?

Noel Nichols Chenango BusinessServices

Reply to
ChenangoBusinessServices

interest

Common sense tells me it should be deductible.

If you had a taxable bond that you were amortizing, publication 550 at the following link

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says that on Schedule B you report the interest or coupon payments, and then the amortization as negative interest. So it means that amortization is deductible, in the sense that it subtracts out of interest. If the amortization is more than the interest, then things get complicated, and you may be able to deduct as on Schedule A not subject to the 2% limit.

So probably the same holds for muni bonds, except on federal the interest and amortization goes on line 8b (tax-free interest).

Reply to
removeps-groups

With Vanguard, for instance, there is a commission when you buy a muni ($5 per $1000 if < $50000, $3 per $1000 if > or = $50,000). I think this is because they only act as an agent for the transaction - some dealer is selling the bond and of course that dealer gets the markup.

Reply to
pixel_a_ted

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