accrued interest

[taxconnected]

I have a question regarding accrued interest.
Can accrued interest on the purchase of a tax exempt municipals (which produces tax exempt income) be used to reduce taxable income on schedule B?
My opinion is that it cannot, but a local CPA firm seems to think it is deductible on sched B.
Appreciate your thoughts on this.

[Gary2]

I don't see how it could be a deduction on federal Schedule B.

I don't see this addressed directly in either Pub. 550 or the instructions for the 1040 or Schedule B. My first intuition is that the accrued interest represents a reduction in basis on the tax-exempt bond, but I suspect the special rules for amortization of premium or discount on tax exempt bonds may treat it differently.

For state tax returns, if it's taxable by the relevant state, then I'd expect the accrued interest to be deductible against it as a return of capital (as well as being a basis adjustment).

[taxconnected]

Thanks Gary

Yes I aqree that it shouldn't be a reduction on Sched B.
I have also been thinking this way:
If I receive $1000 of Tax Exempt Interest I post it on Line 8b.
But if I realize that $100 of that is not mine (accrued interest paid) Then it seems I should reduce line 8b by $100.
Any thoughts?

[Maribeth]

Yes I aqree that it shouldn't be a reduction on Sched B.
I have also been thinking this way:
If I receive $1000 of Tax Exempt Interest I post it on Line 8b.
But if I realize that $100 of that is not mine (accrued interest paid) Then it seems I should reduce line 8b by $100.
Any thoughts?

The purchased intrest was paid in order to pay the seller the amount of interest that was accrued up to the date of sale.

The amount paid reduces the amount of interest the the buyer receives for the current year.

If the bond is t/e there is no Schedule B effect; however the t/e interest will be reduced accordingly and tax calcuations that take into account t/e interest, like taxable SS, will
be calculated correctly.

Maribeth