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EDU BONDS
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TAXES ON BONDS
CAN YOU AVOID PAYING TAXES ON BONDS? CASH VS.
ACCRUAL METHODS FOR REPORTING INTEREST INCOME ON SAVINGS BONDS
Cash Method- If you are like most bond owners, you will probably
use the cash method of accounting to report interest income on savings bonds. That is,
deferring the reporting of interest income until you cash in the bonds or they mature, and
NOT reporting interest annually.
Accrual Method- If you use this method of accounting, you must
report the interest on your bonds each year as it accrues.
IMPORTANT: Whenever you report savings bonds interest, it should
be included with other interest income on your Federal income tax return.
I KNOW DISCUSSING TAXES IS BORING, BUT
READ ON, YOU MAY BE ABLE TO AVOID PAYING SOME OR ALL TAXES ON YOUR BONDS.
The difference between the purchase price of an E, EE or I bond, or
savings notes, and the redemption value (amount you get when you cash them in) is
considered interest income under the Internal Revenue Service Codes (IRS) codes. You will
be responsible to report this income at some point - either by deferring it or reporting it annually.
Normally, the bank, credit union or financial institution will issue a 1099 in
the year the bond is redeemed.
A BIG Bond SavingsBonds.com Inc. Tip:
IF you are in a
lower tax bracket, you may want to be taxed on the interest income EACH YEAR as it
accrues. IN SOME SITUATIONS, A VERY SMALL AMOUNT OF TAX OR NO TAX WILL BE DUE if the
income is reported each year, depending on the value of the bonds. Talk to a financial advisor.
Interest Accrual Definition: Series E, EE, or I savings bonds,
or savings notes, DO NOT have interest paid on them either annually or semi-annually.
Interest is added to the value of the bond and will be given to you only when the bond is cashed. The bond will increase in value as a result
of interest being added to the value of the bond, referred to as interest accrual.
Important: If you are in the cash
method of reporting interest, according to IRS publication 17, you can report the
interest in either of 2 ways:
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Method 1- Postpone the interest until the year in which the E, EE, or I bonds,
or savings notes, are cashed, disposed of or the year they mature.
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Method 2- Choose to report the increase in redemption value as interest each
year. Once you choose this method, you MUST report the interest every
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Note: If you want to change your reporting from Method 1 to Method
2, you can do it without permission from the IRS. In the year you change, (from deferral
to annual reporting of interest), you must report all interest accrued to date and not
previously reported for ALL your bonds.
AN EASY ALTERNATIVE: If you use the
Savings Bond Guru
online service, reporting interest annually is a SNAP! The annual interest amount is indicated.
You can do this year after year
without hassles! Try it right now online with our free trial!
SavingsBonds.com Inc. Tips:
Once you change from Method 1 to Method 2, you must continue to report interest every
year, for all series E, EE and I bonds, or savings notes, you currently own, and for any
additional bonds you obtain at a later date, unless you request permission to change
back to method 1 (deferring). Beware, this procedure can be a headache! You must submit a
statement that meets 6 requirements or complete IRS form 3115 and/or refer to IRS
Publication 550- to change back to deferring the interest (good luck- I wouldn't wish this procedure on my worst enemy).
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