Q: I have read that Section 171 of the Internal Revenue Code permits the annual amortization of a premium paid over the maturity value of a bond or note. I understand this can be done on a straight-line basis, dollar-for-dollar against ordinary income. This is obviously preferable to claiming a long-term loss when the bond is paid off. Is this correct? If so, does the administration's proposed tax-reform bill retain or eliminate this provision?

A: Your information is correct. A premium paid on purchase of a bond or note (corporate or governmental) may be amortized on a straight-line basis over the life of the security -- that is, over the period from purchase to maturity. (Under some circumstances, the first call date may be substituted for the maturity date.)

Amortization each year is based on the ratio of the number of months of ownership during that year to the total number of months to maturity (or call date), applied against the total premium. You are required to adjust the cost basis by the amount of amortized premium each year in the event of a sale before maturity.

The president's tax-reform proposals, submitted to Congress on May 29, are silent on this question. My guess is that the amortization of bond premiums will be retained in any tax bill that finally emerges.

However, this annual amortization is claimed as a miscellaneous deduction on Schedule A. If the proposals for reduction in the number and value of Schedule A deductions are enacted, a lesser number of taxpayers will be itemizing deductions. If you fall into the group that no longer finds it worthwhile to itemize, you will of course lose the opportunity to amortize bond premiums.

Q: I am a beneficiary of an estate amounting to slightly over $100,000; my share will be about $20,000. The settlement attorney said that we (the beneficiaries) were not liable for any inheritance tax. Are there any other kinds of taxes that I will be obliged to pay on this inheritance?

A: You are not liable for any taxes on the inheritance itself. The $100,000 total value is well under the 1985 federal estate tax ceiling of $400,000. You are also exempt from Virginia inheritance tax, because Virginia follows the federal rules governing exclusions (although the rules for calculating the amount of any liability are different).

However, you must distinguish between estate or inheritance tax and income tax on any earnings derived from the bequest. That is, you owe neither estate nor inheritance tax on the $20,000; but if any part of the $20,000 is placed in an interest-earning bank account or other taxable-income-producing investment, then you must pay income taxes on those earnings.

In her August newsletter, Alexandra Armstrong (of Alexandra Armstrong Advisors Inc., Washington, D.C.), a nationally known and widely quoted financial planner, reminds us that a good source for a short-term loan is a brokerage margin account.

If you have such an account with a broker, you usually can borrow up to 50 percent of the current market value of the securities in the account. Interest charged is now running around 10 percent -- substantially lower than the rate you would have to pay on an unsecured loan from a financial institution or on a credit card advance.

Use of some or all of the securities in your account does not prevent you from continuing to receive the interest and dividends they may earn. These earnings may be conveniently applied when received against the interest due or used to reduce the principal amount of the loan.

Of course, you may also deposit funds into the account for the interest and to repay the principal. It's a very flexible and convenient way to borrow money at low cost. In fact, if you have a cash management account, such as Merrill Lynch's CMA or E. F. Hutton's ARA, you are provided with a checkbook that may be used (up to the allowable ceiling) to tap the account for a loan.

Despite the ease of borrowing and the relatively low rate of interest, remember that this is still a loan that will cost you money, and you should know in advance how you plan to repay the funds. With that caveat, don't overlook this source if you need to borrow for a short period.