How do I enter amortized bond premium (not included in 1099-INT) as a deduction to offset interest income?

[rweissa]

The HELP states: "Bonds acquired after October 22, 1986: You can amortize the premium over the life of the bond, and use this amount as a deduction to offset interest income." 

[CarolC]

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 (be sure to select the checkbox under the Received from box to bring up these boxes).  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:

1. Select Federal Taxes
2. Under Wages & Income select Interest on 1099-INT
3. Enter your 1099-INT information, select Continue
4. Select I need to adjust the taxable amount, select Continue
5. Enter the state that pays your tax-exempt interest, select Continue
6. Enter the amount of your premium adjustment as a positive number
7. 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." 

[jhrob]

If I enter the ABP bond amortization as a positive number in Box B of 1099 worksheet, does that mean my interest is reduced by that amount? I am trying to decide whether it is a positive or negative number.  It is a non-covered bond so not reported to the IRS.

[ReneeM7122]

You are correct, you can amortize the premium over the life of the bond, and use this amount as a deduction to offset interest income.

However, 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:

1. Select Federal Taxes
2. Under Wages & Income select Interest on 1099-INT
3. Enter your 1099-INT information, select Continue
4. Select I need to adjust the taxable amount, select Continue
5. Enter the state that pays your tax-exempt interest, select Continue
6. Enter the amount of your premium adjustment (use a negative number if you need to add to the interest reported)
7. 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."

@rweissa

Adapted from CarolC

[redrock2]

Dear ReneeM7122,

Thanks for the info on this thread and to other respondents.

We entered bond premium amounts from 1099 which, as we expected and you point out, did reduce the non-California tax-exempt interest which went into our California income tax calculation.

What we can't puzzle out is that this reduction was not dollar for dollar. There was a small but significant difference between the amount of bond premium that got subtracted and the amount we entered into Turbotax from Box 13 of 1099. In your reply you say "this adjustment happens automatically when you enter the amount from Box 13 and Box 11 in the 1099-INT section of TurboTax."

Is there a place we can see the math behind this adjustment? 

Thanks, redrock2