At first glance, a hefty, government-backed investment may not seem like the most exciting investment idea. But for many investors, that’s exactly what US Treasury Series “I” savings bonds are these days.
New I bonds sold by the Treasury from November 2021 to April 2022 are earning interest at an eye-watering annualized rate of 7.12%. (A new rate will be set every six months thereafter.) And that rate attracts a crowd of security-conscious investors looking for inflation hedging, as well as some tax benefits.
The bonds, which are backed by the full faith and credit of the US government, are sold directly by the Treasury through its TreasuryDirect site. For answers to many frequently asked questions, see Treasury’s “Series I Savings Bond FAQs.” There are no commissions or brokerage fees. The minimum holding period is only one year. But the bonds pay interest for 30 years, or until you decide to redeem them, whichever comes first, the Treasury says. If you redeem them before five years, you lose the interest for the previous three months. After five years, you can redeem the bonds without penalty.
Investors are limited to purchasing up to $10,000 in e-Bonds I per person per year. But you can buy up to an additional $5,000 per person in paper I bonds using your federal income tax refund. (Personal disclosure: My wife and I each bought $10,000 of I bonds last year and plan to buy $10,000 each this year, for a total of $40,000.)
Although the current rate makes Series I bonds very attractive, there are also tax advantages and disadvantages to consider.
Interest paid on savings bonds is exempt from state and local income tax. This can be an important feature for many high-income investors who live in high-tax areas, such as New York, California, New Jersey, Hawaii, Washington, DC, and Oregon, among others.
However, interest income is subject to federal estate and gift taxes as well as state estate or estate taxes.
Interest from savings bonds is also generally subject to federal income tax, but not always. In certain circumstances, you may be able to exclude some or all of the interest earned from federal income tax when the money is used to pay qualified college expenses for yourself, your spouse or a dependent during that year. The IRS offers an explanation in Publication 970, “Tax Benefits for Education.”
Eric Smith, a spokesperson for the IRS, says that when filing your taxes, you must attach Form 8815, titled “Interest Exclusion from Series EE and I U.S. Savings Bonds Issued After 1989 (for filers with qualifying higher education expenses)”. For details, see IRS Publication 550.
You have a choice of when to report interest income on your federal income tax return. Not surprisingly, most people delay reporting interest income until they file a federal tax return for the year in which they receive “what the bond is worth, including interest.” “says the Treasury. The TreasuryDirect site also points out that when electronic I-bonds in a TreasuryDirect account stop earning interest, “they are automatically cashed in and the interest earned is reported to the IRS.”
But there is another option that many taxpayers should consider. Instead of deferring reporting interest income, they can choose to report it annually. This might be a smart move for someone with little to no taxable income. Take, for example, savings bonds held in the name of a child. “The child may pay taxes at a lower rate than will be true years later when the bond matures,” the Treasury said. Once you choose this option, however, “you must continue to do so each year thereafter for all of your savings bonds (or, for example, child bonds) and any that you acquire ( or which the child acquires) in the future”.
For more details, visit the TreasuryDirect website.
As tax filing season gets underway, some readers have raised questions about Qualified Charitable Distributions, or QCDs. Many older investors see this technique as a tax-wise way to donate to charity from a traditional Individual Retirement Account. But, as one reader pointed out, it’s easy to miss this benefit if you don’t pay close attention to detail.
Here’s a quick rundown of the basics: If you’re 70½ or older, you can generally transfer up to $100,000 a year from your IRA directly to a qualified charity tax-free. . A correctly performed QCD counts towards your required minimum distribution for the year.
However, pay particular attention to the words “directly” and “qualified”. The transfer really needs to be done directly of the IRA to a qualified charity. And not all types of charities qualify for a QCD. For example, a reader asked if a Donor Advised Fund, or DAF, is a qualified charity for a QCD. The answer is no. Congress specifically excluded DAFs, a popular charitable vehicle, for this provision.
When you make a qualifying charitable distribution, be sure to write yourself a reminder to help you remember it when preparing tax returns so you don’t mistakenly pay tax on the transfer. It’s easy to make this mistake and it can be very costly.
Finally, here’s an unrelated reminder for donors: if you plan to claim the standard deduction for 2021 (as most taxpayers typically do) and you made charitable deductions during the year, don’t forget a charitable contribution deduction for non-details. . For 2021, singles who do not itemize deductions can generally deduct up to $300 of their donations to qualified charities; joint filers can deduct up to $600. (But donations to donor-advised funds do not count.) On IRS Form 1040, enter the amount on line 12b.
“As with tax contributions, make sure you have a receipt or acknowledgment letter on hand before you file,” says IRS spokesman Smith.
Mr. Herman is a writer in California. He was previously a tax report columnist for the Wall Street Journal. Send your comments and tax questions to email@example.com.
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