You may be overpaying or underpaying taxes on your bond income and not even know it. Bond taxation is complex because there are several considerations that require different tax treatments. If a bond is purchased at par and held to maturity, it is fairly simple. If it’s a taxable bond, you pay income tax on the coupon income. If it’s a tax-free municipal bond, you don’t.
But most bond purchases are not that simple. Bonds are generally purchased on the secondary market at a premium or a discount. Some bonds are purchased at original issue, but at a steep discount to their face value, such as zero-coupon bonds. Some bonds are federally tax-exempt, some state tax-exempt, some are both federal and state tax-exempt.Continue Reading