Pub. 8 2017 Issue 1

Spring 2017 9 West Virginia Banker Example 2 – OID bond purchased within the de minimis limit Issue Price: $60 Revised Issue Price: $65 Purchase Price: $64 Years to Maturity: 10 The purchase price of $64 is less than the revised issue price of $65, so there is a market discount present in addition to the OID. The de minimis allowance is $2.50 (.25% x 10 x 100) and the purchase price is within the de minimis limit’s price of $62.50 ($65- $2.50); therefore, $1 is taxed as a capital gain at maturity. Example 3 – OID bond purchased outside the de minimis limit Issue Price: $60 Revised Issue Price: $65 Purchase Price: $61 Years to Maturity: 10 The purchase price of $61 is less than the revised issue price of $65, so there is a market discount present in addition to the OID. The de minimis allowance is $2.50 and the purchase price is outside the de minimis limit’s price of $62.50; therefore, $4 is taxed as ordinary income at maturity. Increasing yield levels may create complicated tax scenarios for some municipal bonds, but the after-tax yields will often remain attractive to investors. To help clients make sense of this, The Baker Group’s municipal offering sheets provide a True Yield in the Tax-Equivalent Yield section for discount bonds. As shown in the example below, the true yield is after the tax consequences of the discount, but before the normal TEY adjustments.  Dana Sparkman is a municipal analyst in The Baker Group’s Financial Strategies Group. She manages a municipal credit database that covers more than 150,000 municipal bonds, providing clients with specific credit metrics essential in assessing municipal credit. Dana earned a bachelor’s degree in finance from the University of Central Oklahoma as well as the Chartered Financial Analyst designation. Contact: 405- 415-7223, dana@gobaker.com.