Much has been written lately about avoiding the purchase of municipal bonds priced far below par because of the potential application of the de minimis rule which creates taxable income rather than the full tax free treatment you may have been expecting. (I'll not describe that... but if you know what I'm talking about, read on...)
My question: Is there ever any concern about adverse tax treatment when purchasing a US Govt treasury (whether note, bill,...) below par? My initial thought is:
- At the federal level if the note/bond is too far below par it would have a portion taxed as ordinary income instead of interest / dividend, but it makes no difference as the tax rate application is all the same rate.
- At the state level... interest/dividend would bypass state taxation. But what if the note/bond is far enough below par that the gain in part becomes ordinary income? Would that income be taxed (unexpectedly!) at the state level as well as fed?
Thx!
