Individuals who invest in bonds may be subject to taxes on interest income and capital gains and must report their annual taxable interest income when filing tax returns. Tax rules vary for government, corporate, or municipal bonds.

Government Bonds

The interest from 澳洲幸运5官方开奖结果体彩网:Treasury bills, notes, and bonds is taxable at the federal level but not at the state and local levels. Some U.S. government agency securities, such as those issued by the 澳洲幸运5官方开奖结果体彩网:Federal Home Loan Bank (FHLB), are taxable at the federal level but are exempt from state and local taxes. Bonds issued by Freddie Mac and 澳洲幸运5官方开奖结果体彩网:Fannie Mae are taxable at all levels.

Zero-Coupon Bonds

Although they have no stated coupon rate, 澳洲幸运5官方开奖结果体彩网:zero-coupon bond investors must report a prorated po🐻rtion of interest each year as income.

Zero-coupon bonds are issued by governments at discounts, and they mature at par values, where the amount of the spread is divided equally among the number of years to maturity. Consequently, zero-coupon bonds are taxed as interest, just like any other original issue 澳洲幸运5官方开奖结果体彩网:discount bond.

Savings Bonds

Savings bonds are issued by governments to the public and are deemed safe investment vehicles with many benefits. U.S. government 澳洲幸运5官方开奖结果体彩网:Series EE savings bonds are free from state and local tax, and the federal taxes on interest income may be deferred until maturity. The Series I savings bond has similar tax treatment.

Municipal Bonds

Often purchased by high-income investors, municipal bonds can mean tax-free ꧑investment income. The interest from these bonds is tax-free at the federal level, and at the state and l🐎ocal levels, if investors reside in the same state as the issuers.

However, those who buy municipal bonds in the 澳洲幸运5官方开奖结果体彩网:secondary market and later sell them for a capital gain may be taxed at ordinary long- or short-term 澳洲幸运5官方开奖结果体彩网:capital gains rates.

Corporate Bonds

Interest earned from corporate bonds is fully taxable at all levels. Because these bonds typically have the greatest risk of default, they pay the highest interest rates of any bond. Investors who own 100 澳洲幸运5官方开奖结果体彩网:corporate bonds at $1,000 par value, with each paying 7% annually, can expect to receive $7,000 of taxable interest income each year.

Capital Gains

Capital gains are different from interest income paid by bonds. Regardless of the type of bond, any debt issue purchased and sold in the secondary market will post a capital gain (or loss). This includes government and municipal issues, as well as corporate debt. Gains and losses on bond transactions are taxed the same way as other securities, such as stocks or mutual funds, at the appropriate capital gains tax rate.

Amortization of Bond Premium

The amortizable bond premium refers to the price paid for a bond above its face value. The premium paid represents part of the bond's 澳洲幸运5官方开奖结果体彩网:cost basis that may be tax-deductible and amortized over the life of the bond. Amortizing the premium can be advantageous as the tax deduction can offset any interest income the bond generates, thus reducing an investor's taxable income.

The Bottom Line

The tax implications for investors in fixed income can vary by security. If taxable bond income is a main component of a taxpayer's annual taxes, they can consult a 澳洲幸运5官方开奖结果体彩网:certified public accountant (CPA) to assist them with tax planning strategies 🌌that may reduce what they owe.