Bond Premium Amortization Calculator 2026 — Section 171 Election
Calculate annual bond premium amortization using the constant-yield method. See how the §171 election reduces your taxable interest income and tracks your adjusted basis to par.
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Annual coupon as % of face value
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First 5 Years — Premium Amortization
| Year | Adj. Basis | Coupon Received | Amortization | Net Taxable Interest | Tax Saved |
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How Section 171 Bond Premium Amortization Works
When you buy a bond above par, you paid a "premium" expecting that stream of coupon payments. Section 171 lets you recoup that premium by reducing your annual taxable interest.
Bond Premium = Purchase Price − Face Value
YTM = solve: Price = Σ [Coupon / (1+YTM)^t] + Face / (1+YTM)^n
Annual Amortization = Adjusted Basis × YTM − Annual Coupon
Net Taxable Interest = Coupon − Amortization
Tax Saved = Amortization × Marginal Rate
YTM = solve: Price = Σ [Coupon / (1+YTM)^t] + Face / (1+YTM)^n
Annual Amortization = Adjusted Basis × YTM − Annual Coupon
Net Taxable Interest = Coupon − Amortization
Tax Saved = Amortization × Marginal Rate
Example: $100K face, $108K purchase, 5% coupon, 10 years, 32% rate
Premium: $8,000 | YTM ≈ 4.06%
Year 1 amortization: $108K × 4.06% − $5,000 = $619
Net taxable interest: $5,000 − $619 = $4,381 (saves $198 in year 1)
Premium: $8,000 | YTM ≈ 4.06%
Year 1 amortization: $108K × 4.06% − $5,000 = $619
Net taxable interest: $5,000 − $619 = $4,381 (saves $198 in year 1)
Extended
Full Amortization Table + 10-Year Tax Comparison
Year-by-year carrying value chart, §171 vs no-election 10-year tax outcome comparison
Full year-by-year amortization table with carrying value chart and §171 vs no-election 10-year tax outcome comparison.
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Bond Carrying Value — Declining to Par
Adjusted Basis (§171 Elected) Par Value
§171 Election vs No Election — Cumulative Tax Comparison
| Year | §171: Net Taxable Interest | §171: Tax on Interest | No §171: Full Coupon Taxed | No §171: Tax | Annual Tax Saved |
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Full Amortization Schedule
| Year | Beg. Basis | Coupon | Amortization | Net Taxable Int. | End Basis |
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Frequently Asked Questions
What is bond premium amortization under Section 171?
When you buy a taxable bond above its face (par) value, you pay a premium. Section 171 lets you elect to amortize this premium — deducting a portion each year against the interest income from that bond. This reduces your taxable interest income annually. Without the election, you still reduce your basis by the amortizable premium, but you can't deduct it. For tax-exempt bonds, amortization is mandatory (not elective) and reduces your basis.
How does the constant-yield method work for premium bonds?
The constant-yield method computes amortization as: Bond's YTM × beginning adjusted basis − coupon payment received = amortization for that period. Since basis declines as you amortize premium, the amortization amount decreases slightly each year. At maturity, your adjusted basis equals par (face value). The IRS requires this method for most premium bonds.
What happens if I sell a premium bond before maturity?
If you elected Section 171 and sell before maturity, your adjusted basis is your original purchase price minus all premium amortized to date. If you sell above your adjusted basis, you have a capital gain. If below, a capital loss. The amortization reduces your cost basis, so you'll recognize gain (or smaller loss) at sale compared to not amortizing.
Should I always elect Section 171 amortization?
For taxable bonds, electing §171 reduces your annual taxable interest income — effectively deferring and converting some ordinary income to basis reduction. This is generally beneficial in high tax brackets. However, if you expect to sell early, amortization reduces your basis (potentially increasing capital gain). For tax-exempt municipal bonds, amortization is mandatory under §1016 but produces no deduction.
What is the difference between market discount and bond premium?
Bond premium: you paid MORE than face value (e.g., bought at $105 for a $100 face bond). Section 171 amortizes premium against interest income. Market discount: you paid LESS than the original issue price (not OID), typically on bonds that have declined in value. Market discount accrues as ordinary income (not capital gain) on sale or maturity under Section 1276. They are different regimes for different situations.