Be tax savvy with corporate bonds

Money Talk

Your Money

April 04, 2004|By MATT LUBANKO

CAN I claim a capital loss on corporate bonds that mature at a price higher than what I paid to buy them? And if I can't, is there another way I can reduce my taxable income on bonds that have a face value of $10,000 but were often purchased at prices above $10,400?

- B.D.S., Guilford, Conn.

You have two tax-smart choices when dealing with bonds purchased at prices above their face value.

You can declare a capital loss after they mature. Or, over the expected life of the bond, you can spread out, or amortize, the cost of that premium. The so-called "premium to par" would be the extra dollars you spent to buy a bond that would mature at $10,000.

By deducting the annualized cost of the amortized premium, you would reduce the yearly taxable income you'd receive from that bond's semiannual interest payments. On the surface, this corporate bond jargon seems intimidating. But it's easy if you focus on the numbers. If you look at the examples below, you should see that - to declare a capital loss or amortize a bond's premium - all you need to know is subtraction, or division and multiplication.

Example: In early July 2002, you paid $10,291 to buy a General Motors Acceptance Corp. bond that matured in late November 2003. That bond had a coupon of 5.75 percent, meaning it paid $575 yearly in semiannual installments of $287.50. On that bond with a face value of $10,000, your Form 1099 would report $575 in taxable income.

But you could declare a capital loss on this bond for a simple reason: You bought it for $10,291 and it matured at $10,000. And $10,291 (the basis) subtracted from $10,000 would equal minus $291, your capital loss. That capital loss (to be reported on Schedule D) would offset some of the coupon income you received over the 15 months you held the bond. And it would reduce your taxable income on your 2003 federal tax return.

"Declaring a loss is often the recommended option for bonds if you failed to amortize the premium in previous years," said Michael Urso, a certified public accountant with Bailey & Urso LLC in Rocky Hill, Conn.

Example 2: In July 2002, you paid $11,000 to buy a General Electric Capital bond that matures in July 2015. That bond, with a coupon of 6.9 percent, delivers $690 a year in taxable income.

To reduce this taxable income, you'd take the total premium you paid to par ($1,000 or the $11,000 purchase price minus the $10,000 value at maturity) and divide it by the number of months until that bond matures. In this case, you'd divide $1,000 by 156, which would leave you with $6.41.

That $6.41 represents the monthly premium in income. So, multiply $6.41 by 12 (if you held the bond for the full year), which would leave you with $76.92. That's how much your yearly taxable income would be reduced on a bond that paid $690 in yearly coupon income.

"The reward for amortization can be small, but it's an income-reduction technique that can be used from year to year for bonds that mature many years into the future," Urso said.

My 11-year-old son received a Form 1099 for investment and interest income from a brokerage account. Do I have to file a return for my son and pay taxes on the income?

- H.A., Newport News, Va.

Think in increments of $750.

Because your son is under 14, the first $750 he earns is tax free. He would not have to file a return to declare income that would not be taxed.

But if your child under 14 earned anywhere from $751 to $1,500, he would have to file a return, probably with help from you or an accountant. This income above $750 would be taxed at a rate of 10 percent; the maximum tax on income up to $1,500 (the $750 that would escape tax plus the $749 on which you'd pay tax) would be $74, according to IRS tax tables.

Income above $1,500 for a child under 14 is taxed at the parents' rate.

To explore at least two filing options for children, see IRS Form 8814 or Form 8615 (visit, said Dianne Besunder with the Internal Revenue Service in New York.

Matthew Lubanko is a financial columnist for The Hartford Courant, a Tribune Publishing newspaper. E-mail him at

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