Question

Pennsylvania Taxation of Treasury Bonds Purchased on the Secondary Market

Forum|Forum|5 years ago
February 21, 2021
1 reply
0 views

How does Pennsylvania tax the following items for TREASURIES (purchased on the secondary market):
+ Accrued Market Discount (1099-B Box 1f)
+ Bond Premium on US Treasuries (1099-INT Line 12)
+ Accrued Interest Paid on Purchases (1099B)

**Example**:

+ Treasury Interest: $1000
+ Accrued Market discount: $300
+ Bond Premium: $100
+ Accrued Interest Paid: $200

Federal Taxable Interest = 1000 + 300 - 100 - 200 = $1000

PA State Taxable Interest = ????

Thank you.

Not A Product Question

D

DianeW777

Interest income from direct obligations of the U.S. government, the Commonwealth of Pennsylvania, and political subdivisions of Pennsylvania is tax exempt. For a list of exempt obligations, click the link for Tax Exempt Obligations for Pennsylvania Personal Income Tax Purposes (Form REV-1643).

Treasury bonds are treated the same way regardless of how they are purchased. The bond premium is treated the same on PA as it is on the federal return.

You have a choice on how to treat the bond premium.

First, you can choose to add this to the cost basis of the bond which would reduce gain on the redemption/sale in the future.
Or, if you choose to reduce the tax exempt interest by the premium paid for the bond, it must be amortized as described below.

Amortizable bond premium.

If you elect to reduce your interest income on a taxable bond by the amount of taxable amortizable bond premium. But identify the amount to be subtracted as "ABP Adjustment.". The premium is amortized over the life of the bond on a pro-rata basis.

Follow these steps to make a manual adjustment for the bond premium you paid on your tax-exempt and taxable bonds: It should carry over to PA.

Select Federal Taxes
Under Wages & Income select Interest on 1099-INT
Enter your 1099-INT information, select Continue
Select I need to adjust the taxable amount, select Continue
Enter the state that pays your tax-exempt interest, select Continue
Enter the amount of your premium adjustment (use a negative number if you need to add to the interest reported)
Select the Reason for Adjustment - ABP Adjustment
See the images below (federal and PA)

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

P

peabody1998Author

Thank you for the information but I still have questions on how TurboTax handles Treasury interest on Market Discount, Bond Premium and Accrued Interest Paid on my PA STATE return.

On the Federal return, it makes sense that Market Discount adds to my Taxable Interest whereas Bond Premium & Accrued Interest subtract from Taxable Interest. However on the PA return Bond Premium & Accrued interest have no effect on PA Taxable Interest whereas Market Discount adds to PA Taxable Interest.

PA Return - Interest Income Statement:

Bond Premium & Accrued Interest Paid subtract from Line 1 AND Line 2 resulting in no change in Total Taxable PA Interest
Market Discount is added to Total Taxable PA Interest on Line 12

This is clearly different than the federal treatment. This does not seem fair or correct. Any help is greatly appreciated.

D

DianeW777

For Pennsylvania personal income tax purposes, a premium paid on a bond is deemed to be an investment in the bond to obtain the higher bond interest rate. The amortization amount taken for federal income tax purposes must be added back on Line 3 of PA-40 Schedule A, Interest Income, while the Pennsylvania amortization amount is deducted on Line 8 of PA-40 Schedule A.

Double check to see if you see the ABP Adjustment as indicated.

Clarification:

Market discount is the amount discounted from the face amount of a bond at purchase, meaning purchased at less than face amount. Interest that accrues on the bond is taxable. When the bond is sold/redeemed the taxable interest that has been reported each year becomes part of the cost of the bond. This creates a low to no gain on the transaction because of the increased cost basis at the time of redemption.

The amortizable bond premium is a tax term that refers to the excess price paid for a bond over and above its face value. Depending on the type of bond, the premium can be tax-deductible and amortized over the life of the bond on a pro-rata basis (reduces the interest income being reported).

There is no market discount reported on the tax return except when a redemption takes place.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"