The Company You Keep
Click here to speak with a local agent / registered rep.

Taxation of Inflation-Adjusted Securities

Interest income earned on an inflation-adjusted bond is taxed as ordinary income by the IRS. There is no distinction between inflation-adjusted and nominal income. The appreciation of principal and the semi-annual fixed interest on these bonds is taxed in the year it is accrued (earned), even though an investor will not actually receive the principal increases until the bond matures. These increases are sometimes referred to as phantom income. This means that when inflation increases, so do the taxes on inflation-adjusted bonds. There is a risk that in years of high inflation, tax liability could exceed your coupon interest income, wiping out your yield.

Treasury inflation-adjusted bonds are exempt from state income taxes.

If the economy experiences deflation, the deflation offsets interest earned on the bond. If deflation is greater than the interest earned, the unused portion of interest can be carried forward to offset future income. If the deflation amount is not used by the bond's maturity, the bondholder may claim it as a capital loss.

Like other Treasury bonds, Treasury inflation-adjusted bonds are exempt from state income taxes.

Copyright (c) 2009, Precision Information, LLC. All Rights Reserved

Rate
Rating: 5.0/5 (3 votes cast)

Consult a Life Insurance Agent
At no charge to you, a New York Life Agent — professionally trained and experienced — can help you analyze your needs and recommend appropriate solutions through insurance and financial products and concepts. Request a no-obligation review with a New York Life Agent.

This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisers for legal, tax and accounting advice.

Sign up for our What's New Email:
html
text

00394265

To Top
 
Taxation of Inflation-Adjusted Securities

= external link that opens in new window...more

© 2012 New York Life Insurance Company, New York, NY. All rights reserved.  Privacy Policy  Site Help/Disclosures