Question

Treasury bonds and Treasury notes are issued at maturity value, at a discount, or at a premium, depending on prevailing interest rates. Treasury bonds and Treasury notes pay a stated rate of interest semiannually. When Treasury bonds and Treasury notes are either issued or subsequently purchased at either a premium or discount, special rules apply. Specifically, taxpayers may elect to amortize the premium to reduce the amount of interest currently reported. To the extent taxpayers amortize the premium, they reduce the tax basis in the related bond or note. What are the special rules that apply when Treasury bonds and Treasury notes are either issued or subsequently purchased at either a premium or discount?

1) Taxpayers may elect to amortize the premium to reduce the amount of interest currently reported
2) Taxpayers may elect to amortize the discount to reduce the amount of interest currently reported
3) Taxpayers may elect to amortize the premium to increase the amount of interest currently reported
4) Taxpayers may elect to amortize the discount to increase the amount of interest currently reported

Answer 1

Taxpayers can elect to amortize the premium on Treasury bonds and notes to reduce reportable interest income. Discount on Treasury securities is treated as additional interest income upon sale or maturity.

Step-by-step explanation:

When Treasury bonds and Treasury notes are either issued or subsequently purchased at a premium, special rules allow taxpayers to elect to amortize the premium to reduce the amount of interest income currently reported. Conversely, there is no election to amortize the discount on Treasury bonds and notes; instead, the discount on Treasury securities is generally treated as additional interest income and is taxable when the bond is sold or matures. Therefore, the correct special rules that apply are: 1) Taxpayers may elect to amortize the premium to reduce the amount of interest currently reported and 4) Taxpayers may elect to amortize the discount to increase the amount of interest currently reported.