Saturday, April 8, 2017

Savings bonds' tax advantages and as a refund option

Back before I was totally focused on taxes — yes, I know that's hard to imagine — I worked for a corporate conglomerate that had an aerospace subsidiary. That company also was a government contractor.

To underscore our connection to federal government, my employer offered the option to buy U.S. saving bonds through a payroll purchase program.

Savings bonds

I still have a bundle of those Series EE bonds. Yes, real paper bonds. That's some of them pictured above.

It seemed a little silly back then, even though the purchases cost me only half of each bond's face value. Compared to other savings options, savings bonds locked you in for a while. Plus, in those days other financial instruments were paying better interest rates.

To paraphrase Nobel Prize winner Bob Dylan, the times, they a-changed.

My savings bonds now are paying triple or more the minuscule interest rates available on many of today's liquid savings plans.

Keep an eye on your bonds: I periodically check on my bonds' values and when to redeem them for a couple of reasons.

First, after a certain period, they no longer pay interest. No need to hang onto anything that isn't generating income.

Second, when they do mature, you owe tax on the interest even if you don't cash in the bonds. No need to hold a piece of paper that's costing me taxes without offering anything in return.

Some folks view savings bonds as an antiquated financial option. I'm not taking that perspective personally.

As I noted, my purchase was at a time when buying them was a way to be a team player. That laughter you hear through the internet is people who know me oh so well.

They also turned out, as economic conditions changed over the years, to be a decent investment.

And, most importantly, they are only a part of a diversified portfolio.

Tax advantages of U.S. savings bonds: Plus, they also offer some tax advantages. You knew I'd get to tax eventually.

First, Series EE savings bonds are exempt from state and local income taxes.

That's not important to me, since I'm in Texas, one of the seven states without a state or local income tax. But if you're making good money in a state with high income tax rates, then savings bonds offer a way to stash some future cash without worrying about the future cut your local tax collectors will get.

Second, even though the Internal Revenue Service wants to know about your Series EE savings bonds' interest, you don't have to pay tax on the earnings until you cash them.

If you hold  the bonds for the full 30 years from the issuance date that they earn interest, by that time you might be in a lower federal income tax bracket, meaning you won't have to pay as much tax.

Third, Series EE savings bonds offer a federal tax-saving way to pay some college costs.

The interest on the bonds is excluded from your income when you use the Treasury instruments to pay qualified educational expenses and fess such as tuition, fees and required course expenses for yourself, your spouse or a dependent you claim on your tax return.

Bonds for education tax rules: Of course, since this is taxes, there are some other rules. They include:

  • You must have been at least 24 years old on the first day of the month in which you purchased the Series EE bonds.
  • You must redeem the savings bond(s) in the same year you incur the educational expense being paid by the bond(s).
  • If the bonds are paying for your own college costs, they must be registered directly in your name.
  • If you're married, you must file a joint tax return.
  • You can't make over a certain amount. For the 2016 tax year, the savings bond tax exclusion starts phasing out if you are a single filer and your modified adjusted gross income (MAGI) is $77,550; the tax exemption ends if your MAGI is f $92,550 or more. For married, jointly filing (see previous bullet point) taxpayers, the savings bond tax-free income phase-out/elimination range is $116,300 to $146,300. 
    For 2017, inflation adjustments mean this exclusion starts phasing out when a single filer makes more than $78,150 or is a joint return filer with MAGI of more than $117,250. You cannot claim the savings bond interest exclusion at all for the 2017 tax year if your MAGI as a single filer is $93,150 or more; $147,250 or more for joint return filers.
  • The school you're paying with savings bonds proceeds must be a university, college or vocational school that meets federal assistance standards.
  • How much of your qualified expenses you can pay for with the bonds' principal and interest is reduced by the total amount of scholarships, employer-provided educational assistance, fellowships or other tuition benefits you receive.

Remember, too, that if you cash out more in Series EE bonds than you use to pay for qualified higher education expenses, the excess bond interest is taxable.

You claim your savings bond interest exclusion by filing Form 8815 with your tax return.

You also can find more on taxes and savings bonds used for educational purposes in chapter 10 of IRS Publication 970 and at Treasury Direct, the website with complete savings bonds details and a nifty bond value calculator.

Getting a refund? Buy a bond: Finally, if all this has piqued your interest in savings bonds, you can purchase them with your tax refund.

This refund option has been around since the 2010 filing season. In 2011, the IRS made changes that provide more registration options for owners and beneficiaries.

The IRS has a special FAQ web page with more on using your tax refund to buy savings bonds.

More details also are on Form 8888, which you file with your return to tell the IRS that you want all or part of your refund to go toward the purchase of a U.S. savings bond.

Uncle Sam thanks you for filing your return and for supporting him more by buying bonds with your refund.

Weekend Tax Tips, too: This post officially is a Daily Tax Tip. Woo-hoo!

Earlier this tax season, I was limiting the tips to just week days. But as the filing deadline nears, I decided to do weekend tips, too.

So what's the difference between this post and tax tip post?

First, it gets featured in the Daily Tax Tip spot of honor in the top right corner of the ol' blog's pages.

Second, it gets added to the comprehensive special April Tax Tips web page, making it easier to find filing hints.

You also might find these items of interest:

Advertisement

 



source http://feedproxy.google.com/~r/DontMessWithTaxes/~3/k5pwk-3Irdc/savings-bonds-tax-advantages-and-as-a-refund-option.html

No comments:

Post a Comment