IRS Publication 550 — Investment Income and Expenses

Interest you receive on these tax -exempt bonds, if issued after August 7, 1986, generally is a “tax preference item” and may be subject to the AMT . See Form 6251 and its instructions for more information.

The interest on the following bonds is not a tax preference item and is not subject to the AMT .

• Qualified 501(c)(3) bonds.

• New York Liberty bonds.

• Gulf Opportunity Zone bonds.

• Midwestern disaster area bonds.

• Hurricane Ike disaster area bonds.

• Exempt facility bonds for qualified residential rental projects issued after July 30, 2008.

• Qualified mortgage bonds issued after July 30, 2008.

• Qualified veterans' mortgage bonds issued after July 30, 2008.

Qualified bonds issued in 2009 or 2010. The interest on any qualified bond issued in 2009 or 2010 is not a tax preference item and is not subject to the AMT . For this purpose, a refunding bond (whether a current or advanced refunding) is treated as issued on the date the refunded bond was issued (or on the date the original bond was issued in the case of a series of refundings). However, this rule does not apply to any refunding bond issued to refund any qualified bond issued during 2004 through 2008 or after 2010. Qualified bonds issued after December 31, 2010. A portion of the interest on specified private activity bonds issued after December 31, 2010, may be a tax preference item subject to the AMT . The tax preference status will apply to the portion of the interest that remains after reducing it by deductions that would be allowed if the interest were taxable.

Enterprise zone facility bonds. Interest on certain private activity bonds issued by a state or local government to finance a facility used in an empowerment zone or enterprise community is tax exempt.

New York Liberty bonds. New York Liberty bonds are bonds issued after March 9, 2002, to finance the construction and rehabilitation of real property in the designated “Liberty Zone” of New York City. Interest on these bonds is tax exempt.

Market discount. Market discount on a tax -exempt bond is not tax exempt. If you bought the bond after April 30, 1993, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as taxable interest. See Market Discount Bonds, later. If you do not make that choice, or if you bought the bond before May 1, 1993, any gain from market discount is taxable when you dispose of the bond.

For more information on the treatment of market discount when you dispose of a tax -exempt bond, see Discounted Debt Instruments, later. Discount on Debt Instruments Terms you may need to know (see Glossary): Market discount Market discount bond Original issue discount (OID) Premium

A debt instrument, such as a bond, note, debenture, or other evidence of indebtedness, that bears no interest or bears interest at a lower than current market rate usually will be issued at less than its face amount. This discount is, in effect, additional interest income. The following are some types of discounted debt instruments.

• U.S. Treasury bonds.

• Corporate bonds.

• Municipal bonds.

• Certificates of deposit.

• Notes between individuals.

• Stripped bonds and coupons.

• Collateralized debt obligations (CDOs).

The discount on these instruments (except municipal bonds) is taxable in most instances. The discount on municipal bonds generally is not taxable (but see State or Local Government Obligations , earlier, for exceptions). See also REMICs, FASIT s, and Other CDOs, later, for information about applying the rules discussed in this section to the regular interest holder of a real estate mortgage investment conduit, a financial asset securitization investment trust, or other CDO. Original Issue Discount (OID) OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.

All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments. The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). See Discount on Short-Term Obligations, later. 18 Chapter 1 Investment Income Publication 550 (2025)