Income Tax Planning For Savings Bonds

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

…or, don’t pay tax on your series EE or I Savings Bond interest.

The interest on these federal investments is exempt from state taxes, but taxable on the federal side. There are, however, two ways to minimize, or reduce completely, the tax bite.

1. Hold the bonds, and don’t report the interest until maturity or redemption. This deferral can be 30 years. Or —
2. Hold the bonds, and report the interest annually as it accrues, even if you don’t receive it. However, once you start reporting using this method, you must do so for all series EE, series E, and series I bonds you own as well as for any you purchase later.

Which method is better? This is a personal choice, but:

1. If you are in a higher tax bracket, you may not want to increase your burden.
2. If you are in a lower tax bracket, reporting annually may affect your taxes only nominally, if at all.

Strategy For No Tax: Pay For College Expenses

As noted, you must generally pay tax on the interest earned on savings bonds. You may, however, be able to exclude all or part of the interest when you cash in certain bonds under the education savings bond program. The requirements are:

• The bond must be a series EE bond issued after 1989, or a series I bond, and…
• Is either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners), and…
• The owner was at least 24 years-old before the bond’s issue date, and…
• You pay qualified education expense for yourself, your spouse, or a dependent you can claim as an exemption on your tax return, and…
• Your modified adjusted gross income if married filing joint or if a qualifying widow(er) with a dependent child, is less than $139,250 for 2012 ($136,650 for 2011), or if single, $87,850 for 2012 ($86,100 for 2011), and…
• Your filing status is not married filing separately.

Here’s The Loophole

Contributions to a qualified tuition program, or to a Coverdell education savings account, qualify for the tax-free status.

Have you used this strategy to save on taxes? If you missed the opportunity during 2009, 2010, or 2011, just file an amended return.

Questions? Call (718) 332-1040 or email jsreisman@taxhelp1040.com.

Quip: I changed my iPod’s name to Titanic. It’s syncing now.

Have a good week.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.