Electing premium amortization on taxable bonds.

• Author: Peebles, Laura
• Position: Brief Article

Electing to amortize bond premiums can decrease current taxable income and shift current ordinary income to future capital gains.

With interest rates at record lows, an investor is more likely to pay a premium on the purchase of taxable bonds. With a higher rate on ordinary income (as opposed to capital gain income), the election to amortize bond premium on taxable bonds becomes a favorable election to consider.

Once made, this election applies to all subsequent tax years for bonds to which the election applies, owned by the taxpayer at the beginning of the first tax year to which the election is made and for all bonds subsequently acquired by the taxpayer. IRS approval must be obtained to revoke the election.

The method of amortization depends on when the bonds were issued. Before Sept. 28, 1985, any regularly used reasonable method was permissible; bonds issued after Sept. 27, 1985 must generally use the constant yield method.

The nature of the deduction depends on when the bonds were acquired by the taxpayer. * Before Oct. 23, 1986: Amortization is treated as a miscellaneous itemized deduction not subject...