How to File Tax Exempt Bonds on Tax Forms
Tax-exempt bonds are favored among investors due to the tax-free nature of interest earned on the bonds. The interest is tax-exempt at the federal level and sometimes at the state level as well. Tax-exempt bonds are issued by local and state governments to fund municipal projects and often referred to as municipal bonds. However, even though the interest earned on these bonds is not subject to federal income tax, the interest earned still must be reported on your personal tax return.
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Instructions
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Report Tax Exempt Bonds
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Gather the documents received, indicating the interest earned on all tax-exempt bonds you hold. By Jan. 31 of each year, you will receive a statement from your investment broker where the bonds are held.
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Create a schedule of the interest earned on each tax-exempt bond for the year. The schedule can be created in a spreadsheet program or on a piece of paper. This information is not going to be presented to the IRS with your tax return. It is supporting documentation you will keep with your tax documents.
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Report the total interest received for the year on all tax-exempt bonds on line 8b of Form 1040, your personal tax return. Do not report the interest on line 8a of Form 1040 or on Schedule B since it is not part of your total taxable income. By including the interest earned only on line 8b, the total tax-exempt bond interest will be reported to the IRS, but not included in the calculation of your total taxable income.
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Verify the status of your tax-exempt bonds with your state revenue department before filing a state tax return. Interest on in-state tax-exempt bonds generally will remain tax-exempt and interest on out-of-state tax-exempt bonds will be taxable.
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Tips & Warnings
Although interest earned on tax-exempt bonds is free from federal, and sometimes state, income taxes, they are not free from capital gains or losses when sold. When you sell a tax-exempt bond, the sale needs to be reported on Schedule D of Form 1040. The basis is the amount you purchased the bond for. The sale price is how much it sold for. The gain or loss is the difference between the basis and the sale price.
Not all bonds are tax-exempt. If you hold investments in Series EE savings bonds, Series I savings bonds or corporate bonds, the interest is fully taxable and required to be reported on your personal tax return.
