February 8, 2010
You don't really get to vote when it comes to bonds - but there is an election that can save you money today. Bonds are purchased at a premium when the bond is purchased at a price in excess of its maturity value. For a taxable bond, the premium remains part of a taxpayer's basis in the bond until redeemed. This typically results in a capital loss deduction for the taxpayer. There is also an election that allows you to amortize the premium while the bond is held.
Why would you choose the election? Let's look at a quick example. You purchased bonds with a maturity value of $100,000 and paid $105,000, a $5,000 premium, to mature in 10 years. Normally you would hold the bonds to maturity and report a $5,000 capital loss, ten years later. If you make the annual election, you would be able to offset the annual interest paid from the bond by the amortized premium, in this example $500/year ($5,000 premium/10 years). Thus with the election the taxpayer would receive an immediate annual reduction of taxable income compared to waiting 10 years for a capital loss.
As you can see from the example, an immediate reduction in your taxable income results in an immediate reduction of your income taxes. Remember: with any election allowed by the IRS, it is important to consult with your tax advisor for the specific rules and reporting requirement.
Happy tax season!
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).