The key is that this is not a deduction for Schedule A. It is an expense (bond premium) paid for a bond that is greater than face value. Because of this and if the interest was taxable, you could reduce the taxable interest income. Instead it works similarly for tax exempt interest as explained below.
Amortizable bond premium.
If you elect to reduce your interest income on a taxable bond by the amount of taxable amortizable bond premium. But identify the amount to be subtracted as "ABP Adjustment.". The premium is amortized over the life of the bond on a pro-rata basis.
Since this is a bond that is tax exempt, and the tax exempt interest can be reduced by the amortized bond premium, then you must manually track that and enter a reduced tax exempt interest amount for your tax return interest entry. Manually, the reason to track the full amount of this premium that has been used to reduce the tax exempt interest is for redemption. When the bond is redeemed (sold for tax purposes) it will reduce your cost basis in the bond for the amount used to reduce your tax exempt interest.
At the time of redemption you may have a taxable gain.
Please update here if you have more questions.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
