You are going to need to adjust the bond premium in your return because you will not be able to deduct the entire premium. You need to amortize it over a period of time. The amortization is calculated by:
- First, calculate the bond premium by subtracting the face value of the bond from what you paid for it.
- Then, figure out how many months are left before the bond matures and divide the bond premium by the number of months remaining. That tells you how much to amortize on a monthly basis.
- You may need to have a spreadsheet to do this until the amortization period is complete. Now once you determine how amortization the bond premium incurred you will report in the following manner:
- Select Federal Taxes
- Under Wages & Income select Interest on 1099-INT
- Enter your 1099-INT information, select Continue
- Select I need to adjust the taxable amount, select Continue
- Enter the state that pays your tax-exempt interest, select Continue
- Enter the amount of your premium adjustment (use a negative number if you need to add to the interest reported)
- Select the Reason for Adjustment
- Keep this out of OID.
Please read this excellent Turbo Tax post for more a more detailed analysis on this. Especially read the paragraph where it addresses how to report in case if your bond amortization for this year is higher than the interest paid. Fascinating stuff.
@jdnaylor
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