Question on Municipal Bonds

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Subject Author Date Question on Municipal Bonds AndyS 09-10-2008  Re: Question on Municipal Bonds removeps-groups@yahoo.com 09-11-2008  Re: Question on Municipal Bonds Bill 09-11-2008  Re: Question on Municipal Bonds Gil Faver 09-11-2008  Re: Question on Municipal Bonds removeps-groups@yahoo.com 09-12-2008  Re: Question on Municipal Bonds Gil Faver 09-12-2008
Posted by AndyS on September 10, 2008, 6:32 pm Please log in for more thread options I have recently bought some municipal, tax-free , bonds... The par value is 50K, but I had to pay 53K for them since the interest rate they pay is higher than the "going rate". How do I treat the extra 3K ? For instance, can I deduct it from the interest that the bonds pay in the year I purchased them, or do I have to wait 25 years until the bond matures and I get back 50K for the bond I paid 53K for ? Thanks. AndyS -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by removeps-groups@yahoo.com on September 11, 2008, 12:30 pm Please log in for more thread options > The par value is 50K, but I had to pay 53K for them since the interest > rate > they pay is higher than the "going rate". > > How do I treat the extra 3K ? You have to amortize that 3k over the lifetime of the bond. This has the effect of reducing your tax free income (which often makes no difference, but may reduce the taxable portion of social security, etc), and increasing your capital gains if you sell the bonds or they are recalled before maturity. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Bill on September 11, 2008, 12:35 pm Please log in for more thread options andysharpe@juno.com (AndyS) posted: >I have recently bought some municipal, >tax-free , bonds... >The par value is 50K, but I had to pay 53K for >them since the interest rate >they pay is higher than the "going rate". >How do I treat the extra 3K ? >For instance, can I deduct it from the interest >that the bonds pay in the year I purchased >them, or do I have to wait 25 years until the >bond matures and I get back 50K for the bond >I paid 53K for ? The "extra $3K" doesn't really exist as a separate item. Your cost basis was simply $53K -- and that's what you should note in your financial records. If, at some future time, you dispose of the bonds, the $53K will play a role in determining the amount of your gain, or your loss. Otherwise, if you hold the bonds to maturity, and you finally retrieve the face value of $50K, then that's it. You paid a premium for the good yield, and you did so in an open market: your choice. Consider this: If you bought the bonds for $47K, because yields were temporarily higher when you bought them, would you like to report the $3K as a "capital gain" in the year they mature? Bill -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Gil Faver on September 11, 2008, 6:03 pm Please log in for more thread options > > andysharpe@juno.com (AndyS) posted: > >>I have recently bought some municipal, >>tax-free , bonds... > >>The par value is 50K, but I had to pay 53K for >>them since the interest rate >>they pay is higher than the "going rate". >>How do I treat the extra 3K ? >>For instance, can I deduct it from the interest >>that the bonds pay in the year I purchased >>them, or do I have to wait 25 years until the >>bond matures and I get back 50K for the bond >>I paid 53K for ? > > The "extra $3K" doesn't really exist as a separate item. Your cost > basis was simply $53K -- and that's what you should note in your > financial records. If, at some future time, you dispose of the bonds, > the $53K will play a role in determining the amount of your gain, or > your loss. > > Otherwise, if you hold the bonds to maturity, and you finally retrieve > the face value of $50K, then that's it. You paid a premium for the good > yield, and you did so in an open market: your choice. > > Consider this: If you bought the bonds for $47K, because yields were > temporarily higher when you bought them, would you like to report the > $3K as a "capital gain" in the year they mature? > > Bill I don't really understand your answer. But, 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. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by removeps-groups@yahoo.com on September 12, 2008, 2:04 pm Please log in for more thread options > I don't really understand your answer. But, 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. Yes, but this thread is about muni bonds, which are tax-exempt (or at least all the ones I've seen are). If it is a taxable bond and you choose to not amortize, then you do get to take a capital loss or smaller capital gain, but you have to also declare the full interest. If you chose amortize, then your capital gains are increased or capital loss becomes closer to a capital gain, but you do get to deduct the amortization from the interest. -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted Taxation of Municipal Bonds February 17, 2010, 7:07 pm question about Savings Bonds September 15, 2009, 9:12 pm Two municipal bond fund questions December 26, 2008, 9:25 pm Savings Bonds December 12, 2006, 2:34 am Help with sale of HH Bonds January 26, 2007, 11:52 pm Inherited EE bonds February 27, 2007, 10:11 pm Bonds in an estate February 14, 2008, 11:56 am Series HH Bonds March 30, 2008, 3:19 pm OID on Worthless Bonds March 7, 2009, 6:03 pm FFCB and FHLB Bonds April 8, 2007, 8:35 pm