Amortizable Bond Premium
Candlefocus EditorThe amortization process consists of reducing the original acquisition cost of a bond over a set period of time. Amortization of a bond premium simplifies the treatment of this cost, by dividing it into multiple payments over a period of time, and then deducting the sum each year. 3
Each contribution of the premium for a taxable bond provides the investor with a deduction of accrued market discount. Deductions for amortized bond premium incurred each year are reported on Schedule B (Form 1040) to figure the investor's adjusted basis for the bond. 3
An amortized bond premium can be of mind-boggling complexity and so professional advice should be sought when considering a purchase. But by following the correct procedure in calculating and amortizing the premium, investors can reduce their taxable income, and thus their tax obligation. To calculate the amortizable bond premium, the investor must have a complete understanding of the bond's interest rate, cash flows, and yield.
The amortizable bond premium can be an important way for investors to reduce their tax liabilities on bond income. By properly calculating the premium and amortizing it over its lifespan, investors can benefit from a lower taxable income. However, since this calculation can be complicated and tax-laws are constantly changing, it is recommended that investors seek the advice of a professional financial planner or accountant before buying a bond with an amortizable premium.