We have to first better understand what Savings Bonds is by further explaining its definition before we proceed to the complicated part. Savings bonds are securities coming from the US Treasury Department issued as savings certificates to individual investors in small amounts. They usually bare face value demotions from $50 to $10, 000. They offer funding dollars to the U.S Government who, in return, will pay you interest for allowing them to use your money. Today, big institutions redeem bonds but no longer sell them unlike in the past where savings bonds are offered by banks and credit unions all the time.
Saving Bonds Taxation
Only the federal level takes care of the interest from EE U.S savings bonds and not the state or local levels when it comes to income. Federal and state estate, gift and excise taxed also taxes its interest. To figure out what the interest is, you have to find how much the bond can be redeemed for that is above the face value of the bond or its original price. Whoever owns the bonds will be responsible for tax payments on the interest. If you decide to purchase a bond and is the sole owner of it, you’ll be taking care of the interest’s tax payments. PArents on the other hands report the interest and include the payable taxes on their tax return if their child is the sole owner of the bond.
Savings Bonds Tax Benefits
The eligibility for the tax benefits on savings bonds will depend on your current situation. If you’re new to it, there will be no periodic interest subject to income tax but its value will increase over the years. You can, therefore, claim the interest income a little later until you are able to redeem the bonds or until they mature. SAvings bonds allow you to avoid claiming your income at the moment and claiming it later instead.
In addition to this, an Educational Tax Exclusion is another tax benefits savings bonds offers. You must first exchange your bonds for cash and use the money for qualified higher education expenses in order to have the chance of excluding that income from taxes. It’s important that rules are being followed when it comes to the types of expenses, income limits, and other specifications. Last but not the least, you are excepted from paying state and local income taxes if you have a savings bonds interest income. Isn’t it great to be able to spend more than what you earn? However this doesn’t work in all states, so make sure that you first talk to your trusted tax preparer about it this subject.
Savings bonds offer reasonable inflation-indexed return as well. It is obviously a safe investment strategy in the long run because it is backed by a U.Us government issued-security.
Things To Consider When Investing In Savings Bonds
Deeming Restrictions. You have to be aware of the restrictions that could happen when redeeming savings bonds. You may not be able to cash them in within 6 months to 1 year from the original date. A penalty will be charged for savings bonds that are cashed in within the first five years which is losing your last three months interest income.
Inflation Risks. Just because they’re safe to invest, doesn’t mean they offer large returns. This may cause your earnings to be affected by an unpredictable inflation. It’s recommended to only use savings bonds were the principal is not put at risk. If you think you don’t think you can handle situations like inflation from happening, you may want to explore other means of investment.
How and Where to Buy Savings Bonds
There are three different ways to purchase savings bonds:
Treasury Department Website. Purchasing savings bonds from their website is easier and faster if you’re buying it as a sole owner. The process is done within 10 minutes which is pretty impressive and inviting.
Savings Bonds As Gifts. If you decide to buy savings bonds as a gift (buying it for someone else), you can still purchase them online or through your tax return (discussed below). It may not be a little exciting compared to giving an actual tangible gift, but if the person you’re giving it is into investments too, there shouldn’t be any problem.
Tax Refund Purchase. Purchasing savings bonds is now possible through using your tax refund. The Series I bonds is the only method available for you to use. Ask your Accountant to use Form 8888 when filing your taxes as it will allow you to buy savings bonds from your tax refund.
