Should i recognize a bond premium amortization on tax exempt interest bonds? and if so where?

[Iris1]

If the bond yields tax-exempt interest, you must amortize the premium. This amortized amount is not deductible in determining taxable income. However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year using the constant yield method. This is necessary to reduce the bondholder’s tax basis in the tax-free bond to determine if there is a capital gain upon disposition.

As long as the bond is held to maturity, there will be no capital gain or loss associated with the bond. If the bond is sold before maturity, you may have capital gain or loss based is the portion of the premium which has not yet been amortized.

Generally no reduction for premium amortization is allowed since the interest is not taxable, but if the bonds are taxable (out-of-state) bonds, the taxable income can be reduced by the amount of premium amortization.

http://www.irs.gov/publications/p550/ch03.html#en_US_2014_publink100010265

FYI:
How To Report Amortization

Subtract the bond premium amortization from your interest income from these bonds.

Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, print “ABP Adjustment,” and the total interest you received. Subtract this amount from the subtotal, and enter the result on line 2.

[jedwrite]

This does not tell me how to do this in TurboTax. Furthermore, I do not understand the distinction between "all interest" and "total interest."

[SteamTrain]

If you have a 1099-INT that contains both box 1 and box 8 $$ showing....you need to first create two 1099-INT forms.  One that shows just the box 1 thru 7 $$ , and another that shows just the box 8 $$.  Then, you put the bond amortization amount into box 11 of whichever -INT form the bond amortization amount applies to.

Amortization is required on tax-exempt bonds,
........but is optional for taxable bonds, if you choose to amortize the premium for taxable bonds, you must do so for all of your taxable bonds acquired after 1988..
See pages 34 & 35 of:
http://www.irs.gov/pub/irs-pdf/p550.pdf

[Ramon2016]

How about an example?  These instructions are not useful.   How does the software know the amortization period?

[LeonardS]

 To enter your 1099-INT Box 1 & Box 8 information follow these steps.

• With TurboTax open Wages & Income.
• Scroll to the Interest and Dividends select the line Interest on 1099-INT.
• Follow the prompts to the page Let's get the info from your 1099-INT
• Enter your box 1 information
• Then check the box My form has info in other boxes (this is uncommon).  
• You will now be able to enter your tax exempt interest in box 8

[SteamTrain]

@Ramon2016 

This is a very old post...transferred into this forum last year, but referring to some other year...long ago.

The forms have changed some since it was written, and the later box numbers have changed.

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1)  TTX doesn't know the amortization period....you must provide the yearly amortization amount yourself....the exact amount for 2019 is either:

....a)  shown to you on your 1099-INT form itself  (a "covered" bond purchase)

.....b)  or bonds purchased long ago (  termed "non-covered"...ie. before somewhere around 2010-2013) you'd have to calculate the amount yourself.

2) depending on the bond type, and referring the current 1099-INT form layout, you would enter show bond interest, and amortization amounts in the following way  (but read the main 1099-INT info from your broker's form):

....a)   taxable bonds:   Interest in box 1,  bond premium box 11

....b)  US bonds:   Interest in box 3,  bond premium box 12

....c)  tax-exempt bonds:   Interest in box 8,  bond premium box 13

[Mike_TT_User58]

This is probably the best post.  Your brokerage may send you a consolidated 1099-INT.  But you will need to split into separate 1099-INT entries in turbotax for each bond.

Create a 1099-INT for each tax-exempt bond.   Enter the Tax-Exempt interest in Box 8 and the Bond Premium in Box 13.

For each taxable bond, create a 1099-INT.  Enter the interest in box 1 and the Bond Premium in Box 11.  Note that taxable bonds don't have to be amortized, but tax-exempt ones do.

[SteamTrain]

Ohhh...I don't agree that every bond needs to be broken out into it's own 1099-INT.  Certainly there can be situations where some bonds need that treatment, but not in normal situations.

But it can be immensely helpful to break out total box 1 (and 11) from box 3 (and 12), from box 8 (and 13) into 3 separate 1099-INT forms.   It is particularly critical to do this any time you bought any of the bond types with accrued interest to be declared.......because if you report accrued interest for a recently purchased bond, when all bond types are on one -INT form, the accrued interest will be (improperly) allocated across all three bond types.

[no-name1]

Is Steam Team reply from March 8, 2021 still correct for 2022 returns?

[JosephS1]

No, not any longer.  The entry screen for 1099-INT encompasses most situations for multiple box entries.  If you have a 1099-INT with multiple box entries be sure the place a checkmark in the "My form has info in other boxes (this is uncommon)" and the rest of the entry screen will open for you to enter the additional information.

@no-name1

[SteamTrain]

@JosephS1   @no-name1 

I agree it's not needed to break up your 1099-INT ..In MOST situations.

But if you had any "Accrued" Interest to declare on a follow-up page...for bonds bought on secondary market during the year, then you do have to break out the bond-type $$ into their own 1099-INT.

__________________

Example: you have bond interest in boxes 1,3, and 8.  And you bought a Muni bond on the secondary market during 2022 for (say) 102, with $100 accrued interest you also had to pay the owner.   You need to break out the $$$ in box 8 (&13 if any) into it's own 1099-INT. 

IF you don't do that, and enter the accrued interest value on the follow-up page...the $100 will be allocated proportionately (and improperly) to reduce the $$ showing in all three boxes 1,3, & 8.

[no-name1]

Thank you.

Here is a little more info. All my bonds are munis.  On the consolidated broker 1099 statement there are 18 bonds.  One had accrued interest paid (and no interest earned in 2022 since I bought it toward the end of the year).  Three of them have bond premiums totaling a small amount - $9.60

Do I break out only the bond that I paid accrued interest to report on its own 1099 and then lump the other 17 bonds on another 1099?  

I'm not sure it's worth breaking out the other individual bonds for premium since it's such a small amount.

[SteamTrain]

I have a similar situation.

I just put ALL of the Muni bond $$s on the separate 1099-INT....and the total  premium amortization can go in box 13.   Yeah, it's not a huge issue.

For the accrued interest, you normally enter that on a follow-up page .....BUT....since you, did not get an actual interest payout in 2022 for that one bond with the accrued interest, you have to wait for the 2023 1099-INT to report it then.  Make a note to yourself and start a new 2023 folder.

[wgraybeard]

I have both bond premiums and accrued interest on tax exempt bonds.  When I get to the "Report Interest Adjustment page, should both items be added and reported as other reasons, or is the bond premium part handled automatically, and only the accrued interest should be reported here?