2011 Q2 | Taxes on Bonds Bought at a Premium or Discount

2011 Q2 | Taxes on Bonds Bought at a Premium or Discount

The taxation of bond interest is relatively straightforward. Assuming the bonds are held in a taxable account, the interest on corporate bonds is generally subject to all income taxes: federal, state (if applicable), and local (if applicable). Treasury issues pay interest that’s subject to federal income tax but not state or local tax. Most municipal bonds pay interest that’s exempt from federal income tax. If you buy a bond issued in your home state, you probably will avoid all tax on the interest income. Plus or minus You may have a more difficult time figuring capital gain or loss on a bond, however. Bonds are issued at so-called par value (for example, $1,000 per bond). Then prices fluctuate as interest

2011 Q2 | Capital Gains, Not Ordinary Income

2011 Q2 | Capital Gains, Not Ordinary Income

Tax-exempt bonds that were purchased with a market discount before May 1, 1993, are not treated as market discount bonds. Any gain on the sale of such bonds is treated as capital gain. For example, suppose you bought tax-exempt bonds that were issued with a $10,000 par value. Before May 1, 1993, you paid $9,000 for those bonds. If you sell the bonds now for $9,500, you’ll have a $500 long-term capital gain. A similar example using tax-exempt bonds bought after April 30, 1993, would result in $500 of ordinary income taxed at higher rates.