How to Report Bond Premium on Tax-Exempt Bonds From Box 13

Individuals navigating their tax obligations often encounter complexities when dealing with investment income. Understanding how to handle bond premium on tax-exempt bonds, particularly the amount reported in Box 13 of Form 1099-INT, can be a common point of confusion. This article aims to clarify the nature of this amount and provide guidance on its proper reporting on your federal income tax return.

Understanding Bond Premium and Tax-Exempt Bonds

Bond premium occurs when a bond is acquired for a price exceeding its face (par) value. This situation typically arises when a bond’s stated interest rate, also known as its coupon rate, is higher than the prevailing market interest rates for similar bonds. Investors are willing to pay more than face value to secure the higher yield offered by the bond’s coupon.

Tax-exempt bonds are debt instruments issued by state or local governments, or their agencies, to finance public projects. The interest income generated from these bonds is generally exempt from federal income tax. Depending on the issuer and the investor’s state of residence, this interest may also be exempt from state and local income taxes.

Even though the interest earned on these bonds is tax-exempt, the premium paid for such a bond still requires accounting. Box 13 on Form 1099-INT specifically reports the amortized bond premium for the year on tax-exempt bonds. This amount reflects the portion of the premium that has been systematically reduced over the reporting period. The process of amortization gradually decreases the bond’s cost basis, aligning it with its face value as the bond approaches maturity. This adjustment to the bond’s basis is relevant for calculating gain or loss if the bond is sold before its maturity date.

Identifying Your Amortized Bond Premium Amount

For most taxpayers, the primary source for identifying the amortized bond premium on tax-exempt bonds is Form 1099-INT. Specifically, the amount you need will be found in Box 13, labeled “Bond premium on tax-exempt bond.” Financial institutions and brokers typically provide this form, and Box 13 indicates the portion of the premium allocated to the interest payment(s) for the year.

There are instances where Box 13 might be blank or not reflect the correct amortized premium. This can occur if you purchased the bond on the secondary market and the broker did not calculate or report the amortization, or if the bond is considered a “noncovered security.” In such cases, you may need to determine the amortized bond premium yourself. The Internal Revenue Service (IRS) requires the use of the constant yield method to calculate amortizable bond premium for each accrual period.

While detailed calculation steps are complex and beyond the scope here, the constant yield method essentially spreads the premium over the bond’s life based on its yield to maturity. If you find yourself in a situation requiring self-calculation, tax preparation software often has features to assist with this, or you may need to consult a financial professional. For comprehensive guidance on bond premium amortization, including the constant yield method, IRS Publication 550, “Investment Income and Expenses,” is a valuable resource.

Reporting on Your Tax Return

Once you have identified the amortized bond premium amount, typically from Box 13 of your Form 1099-INT, the next step involves accurately reporting it on your federal income tax return. The interest from tax-exempt bonds, including the amount shown in Box 8 of Form 1099-INT, is reported on Form 1040, Line 2a. This line is for informational purposes only, as tax-exempt interest is not included in your taxable income.

For a more detailed breakdown of interest income, you will use Schedule B, “Interest and Ordinary Dividends.” This schedule is generally required if your total taxable interest or ordinary dividends exceed $1,500, or if you have certain other conditions, such as reporting amortizable bond premium. On Schedule B, the total tax-exempt interest reported in Box 8 of Form 1099-INT is typically entered on Line 2.

The amortized bond premium from Box 13 is then applied as a negative adjustment to this amount. You will subtract the Box 13 amount from the Box 8 amount on Schedule B, Line 2, and report the net figure. This ensures that only the net tax-exempt interest is reflected. The adjusted net figure from Schedule B, Line 2 is then carried over to Form 1040, Line 2a. Tax preparation software is designed to streamline this process, often prompting you for the amounts from your Form 1099-INT and automatically placing them on the correct lines of Schedule B and Form 1040.