Many baby boomers and retirees prefer to invest in savings bonds because they are safe and convenient investments, but stocks don't always earn interest. Over time, they expire, and the IRS requires you to pay tax on the interest you earn.
When the time comes, the Internal Revenue Service (IRS) offers options to redeem your bonds and pay the interest. But, you can avoid paying interest.
Understanding Savings Bonds
Series EE bonds are the most common type of bond issued by the US Treasury. Earn interest for 30 years if you keep it for that period, but you must keep it for at least a year, or you will lose your investment. EE bonds have a fixed interest rate of only 0.10%, but you pay a variable rate of 1.57% from 2019 if you bought them between May 1997 and April 2005.
Federal law allows taxpayers to purchase up to $ 10,000 per type of collateral each year. This amount increases to $ 20,000 if you are married and your spouse wants to buy. You can also buy an additional $ 5,000 if you use tax refunds to purchase paper Series I bonds.
When is Interest on Savings Bonds Taxable?
Even with these interest rates, your bonds will earn you a certain amount of interest each year, and the IRS wants their share of that money. But you have the choice of when to pay this tax with EE and I bonds.
You can defer interest until the redemption of the security or until maturity, whichever occurs first, or you can pay annual interest. Unfortunately, you can't change your mind later; it is a unique choice. And if you decide to defer the interest, you have to pay the associated taxes (up to 30 years, unless you pay off the bonds first), all at once that year.
There is another problem. It would be best if you treated all of your EE titles the same. You cannot carry interest in one and pay the other annually.
Interest on securities is only taxable at the federal level. You can avoid state and local taxes on interest earned on your bonds, which could make them an attractive investment option for taxpayers living in states with high tax rates.
Education Tax Exclusion
So, is there a way out of all of this? Yes, for some collaborators.
You can avoid paying interest on EE and I Series Savings Bonds by using the money to cover eligible higher education costs for you, your spouse, or a dependent family member. It comes with a set of classification rules:
If you are married, you must file an income tax return with your spouse.
Series EE and I bonds must have been issued after 1989.
The holder of the title must be at least 24 years old on the first day of the month in which it was issued. If you are the owner and meet this age requirement, you can exchange them for free to pay for a child's education costs, even if they are not yet 24 years old.
The school must have a US Department of Education Student Assistance Program.
You must pay the education cost in the same year you use the vouchers, and only a few costs are covered: tuition, fees, some books, and some equipment, such as a computer, which may be needed for a particular lesson. Accommodation and board and leisure or sports fees are not eligible.
You must use all the income from the repurchased bonds, both principal and interest, to pay education costs. If the income is more than what you owe the school, the interest rate that would otherwise be exempt from tax is proportional.
Must meet revenue guidelines.
You can also direct all buyout bond funds to a Coverdell Education Savings Account if no one in your family is ready for college yet.
Income Requirements for the Education Tax Exclusion
Not all taxpayers can benefit from the tax exemption for education. A final rule is the modified adjusted gross income (MAGI) for the year you use the bonds to pay tuition.
When MAGI reaches a certain limit, only part of your title's interest is excluded from taxes. If your income reaches the second limit, you will not be able to request exclusion. Any interest earned on the bonds is valid for MAGI.
As of 2019, a single contributor can earn up to $ 81,100 and still request a full exclusion. The limit increases to $ 121,600 if you are married. The exclusion begins to decrease and is eliminated for people who submit a single application with a MAGI of $ 96,100 or $ 151,600 for marriage applicants who submit together.
Reinvest to avoid the Tax on Saving Bonds Interest
Until 2004, it was possible to continue to defer interest on the bonds, even though the Series EE bonds had matured. You could reinvest that money by capitalizing on the bonds and then using the proceeds to buy the Series HH bonds. You can then postpone the principal's interest. However, the US Treasury no longer issues Series HH bonds, so this option is no longer available.
Avoid taxes on Inherited Savings Bonds.
However, you may have other options if you inherit the titles. The deceased's estate's executor can redeem the bonds, pay interest on the estate, and reissue them. This allows you to avoid paying the interest earned during the life of the deceased.
FOR MORE INFORMATION ON SAVINGS BONDS TAXES, CONTACTING Flynn Financial Group, Inc. MAKING AN APPOINTMENT OR HOW ELSE WE MIGHT BE ABLE TO HELP YOU, PLEASE CLICK ON THE BLUE BUTTON BELOW.
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