High interest rates are not often associated with U.S. Savings Bonds, (although older Series I bonds are currently earning 5.17%*). However, even the recent lower interest rates for new bond purchases can be compensated by some of these very favorable tax advantages:
Savings Bonds are free from any state or local taxes on the interest earned. They are subject to federal income taxes under most circumstances.
You can defer the reporting of interest income from savings bonds on your Federal Income Tax Return until the year the bond is redeemed or when the bond reaches final maturity and is no longer earning interest (even if you are still holding the bond). Most Series EE and I Bonds will earn interest for up to 30 years.
Consider the benefits of reporting interest earnings annually. This lesser known, or used, financial option allows you to avoid having to report a large amount of interest when redeeming or when the bond reaches final maturity. Once you select the annual reporting option, you must continue to report the interest earned annually for all existing bonds you own and any future savings bond purchases. You will likely need a savings bond management service or calculator to obtain the annual interest earned amounts, unless you have a PHD in finance or are Albert Einstein.
The Education Tax Exclusion exempts savings bond earnings from federal income tax if the bond proceeds are used to pay for qualified higher education expenses. The good news is that the bonds did not have to be earmarked for the Education Tax Exclusion at the time of purchase. Only bonds issued after 1989 apply. The full tax exclusion is also available to single taxpayers and married persons filing jointly with specific annual income amounts. There are rules for eligibility and seven criteria that must be met for the Education Tax Exclusion Program.
There are tax advantages if you had purchased Series EE or I Bonds in your child’s name. When bonds are redeemed, if the child is still your dependent, you will pay taxes on the interest earnings at the child’s rate. In certain cases, the child’s rate could be 0% depending on annual income limits set by the IRS.
Before turning your nose up on U.S. Savings Bonds for inclusion in your financial portfolio, consider that the generally low returns can often be offset by many favorable tax advantages. If you own old older savings bonds, use a complimentary savings bond calculator to check the interest rates. They may be a lot higher than you think. You could experience a win-win financial situation.
By: Jackie Brahney, Marketing Director, SavingsBonds.com, www.SavingsBonds.com jbrahney@savingsbonds.com Twitter: SavingsBondsgal
*for Series I U.S. Savings Bonds issued in May 2000, for the month of April, 2016. Interest rates are subject to change monthly.