Posts Tagged ‘IRS’

Tax season is a good time to review your US Savings Bonds.  Many people are holding matured bonds that no longer earn interest.  When mature bonds are not cashed in, they are in violation of IRS statutes and risk fines and penalties for owners. 

Taking the time each year to review your savings bond maturity dates can not only help save fines and penalties but can also help you manage your assets better.

Savings bond owners have the option of paying tax two ways.  The first and most used is to report interest when you receive it.  Usually, this is when you redeem the bond. 

The second is to report the increases in the value of the bond as interest each year.  Either way, you will receive a 1099-INT when the bonds are redeemed. If you use the second method, an adjustment to this interest is made by letting the IRS know you reported the full amount of interest on previous returns.  The IRS does permit you to change from one method to the other.

People with mature bonds will pay a lump of tax and miss out on the financial planning side of holding these bonds.  These bonds are free from state taxes so there are no worries there.  One goal of financial planning is to reduce your taxes.  For the retired living on fixed income, a large tax hit can really affect your budget.  Careful planning over several years can avoid this trap.

When used in retirement, savings bonds can be used to help cash flow and avoid dipping into retirement accounts.  A review of interest rates and yields and time to maturity will determine which bonds to cash in.  Bonds close to maturity and earning a lower interest rate may be more beneficial to cash in.  Your income and need for cash will help determine the best bond to choose. 

Savings bonds issued after 1989, or a series I bond, can be used for education expenses.  Expenses must be qualified expenses, such as tuition and required fees.  Room and board are not included.  Using savings bonds for education is a great way to avoid taxes.  Interest from bonds used for education expenses provides tax-free benefits. 

Savings bonds provide a great way to save and a great benefit when they mature — if planned correctly.  Remember: Review your savings bonds and make a list of maturity dates. Be prepared to cash them in and plan so that they are not all cashed in the same year.  This will limit your tax liability.