Question: On July 1 , 2 0 2 4 , Katrina purchased tax - exempt bonds ( face value of $ 7 5 , 0 0

On July 1,2024, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the annual interest rate is 3%. Discuss the tax reporting implications of this transaction.
Amortization of bond premium and the related basis adjustment
areare not
mandatory for tax-exempt bonds. The effective interest method is used to amortize the bond premium for both book and tax purposes. However, because the bonds are tax-exempt, any interest income
isis not
included in gross income. Likewise, the implied interest expense associated with the amortization of the bond premium
isis not
deductible. Even though any amortized bond premium
isis not
deductible, Katrina's adjusted basis must be reduced.

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