Bond adjustments happen on the federal return and the adjustment will carry over to your state tax return. Your bonds also can be allocated, so any Tennessee bonds you hold will be exempt from Tennessee tax.
There is not a deduction for the premium you paid for your tax-exempt bonds on your federal return. You are required to amortize the premium each year and this will reduce your basis (what you paid). So when the bond matures, your basis will be the face value of the bond. Generally, there will not be a loss.
For tax-exempt and taxable bonds, this adjustment happens automatically when you enter the amount from Box 13 and Box 11 in the 1099-INT section of TurboTax. The adjustment will reduce your amount of reportable tax-exempt interest on Form 1040, line 8b. For taxable bonds, the adjustment will reflect on Schedule B, Part 1.
If adjustments for bond premiums are not reflected on your 1099-INT, you can manually enter the bond premium adjustment in the 1099-INT section of TurboTax. This is also where you can report any accrued interest paid.
Follow these steps to make a manual adjustment for the bond premium you paid on your tax-exempt and taxable bonds:
- 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
For taxable bonds, IRS Publication 550 states "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.
Bond premium amortization more than interest.
If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28.
But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Any amount you cannot deduct because of this limit can be carried forward to the next accrual period.
Pre-1998 election to amortize bond premium.
Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988.
Bonds acquired before October 23, 1986.
The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit.
Bonds acquired after October 22, 1986, but before 1988.
The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond."
