Show #273 Airing Sunday, October 17, 2004
Should you keep or cash in your savings bonds? To answer that question, you need to consider how much interest you’re earning , and what’s the best way to keep the tax low when you cash them. Here to help us decide how to handle our savings bonds is someone you can easily bond with, Tony Mercuri from Ta-Check Tax Service.
Question: Many folks own US Savings bonds. Do you pay taxes on these, or are they tax free?
Answer: E or EE Bonds, which are the most common type of US Savings bonds, are not tax free. They are Tax-Deferred.
Question: How does that work?
Answer: Let’s start at the beginning. EE Bonds are bought at a discount. If your bond has a $50 face amount, you bought it for $25. It pays all interest upon maturity or redemption. So you pay no taxes until you redeem that bond. In my example, you would cash it in for $50 and would owe taxes on $25.
Question: So you pay federal, state, and local taxes when you cash it in?
Answer: You only pay federal income taxes on the bond. They are not subject to state or local taxes.
Most people do not realize, however, that you can actually pay the tax as you go if you would prefer. Once you make that election, to claim the interest annually, it applies to all the E/EE bonds that you own or purchase in the future.
Most people do not do this and prefer to have them grow tax-deferred.
Question: What if they mature and you do not want the money, or would like to defer it longer?
Answer: Unfortunately, there is nothing you can do. You used to be able to convert them to H bonds, but that option stopped this year. However, interest earned on certain EE bonds can be tax free if used for college tuition.
Question: When you pay tax on savings bonds, are they taxed as ordinary income or as capital gains?Answer: They are taxed at your ordinary income tax rate.
The biggest mistake I see people make is cashing them in without realizing the consequences. When a client comes to me, I can tell them what amount is taxable if I have the serial number off the bond. Remember for those of you receiving social security, this interest is figured into the calculation used to determine how much of your social security is taxable. I have seen many people come to me after cashing their bonds in, and it really increases their tax liability.
Answer: Definitely not. If you come in, we can work out a redemption schedule for you so you don’t have any tax headaches.
Question: I'm not going to let you go without agreeing to help our viewers. What will you do for them?
Answer: If they want to come in, I’ll give them a free savings bond analysis. We’ll figure the taxable amounts of their bonds, and we’ll determine how much they can cash without adding to their tax rate.
Most people just hold their savings bonds, often too long, and then pay way too much tax. Don’t become irrationally bonded to your bonds. For more information, give Ta-Check a call. They can help you work out a schedule that will avoid tax trouble. My thanks to Tony Mercuri.
