{"id":1147,"date":"2022-11-06T11:25:00","date_gmt":"2022-11-06T18:25:00","guid":{"rendered":"http:\/\/financegourmet.com\/blog\/savings\/not-cashing-savings-bonds-to-avoid-taxes\/"},"modified":"2023-02-08T14:29:19","modified_gmt":"2023-02-08T21:29:19","slug":"not-cashing-savings-bonds-to-avoid-taxes","status":"publish","type":"post","link":"https:\/\/financegourmet.com\/blog\/savings\/not-cashing-savings-bonds-to-avoid-taxes\/","title":{"rendered":"Not Cashing Savings Bonds to Avoid Taxes"},"content":{"rendered":"\n

There is a common misconception about avoiding taxes by not cashing savings bonds. While there are no penalties for not cashing mature savings bonds, there is no benefit to holding them for tax purposes, either. Sometimes people wonder, “Do savings bonds expire?”<\/p>\n\n\n\n

For the most part, I typically assume that people who have misinformation came by it honestly. Usually, they didn’t quite understand fully what they read or were told. After all, one of the trickiest things about achieving financial independence<\/a> and personal finance<\/a> is that there are so many exceptions and nuances. In a lot of cases, what is absolutely true for one person is not true for someone else because of their individual circumstances.<\/p>\n\n\n\n

Tax Consequences of Cashing In Savings Bonds<\/h2>\n\n\n\n

\"us-saving-bonds\"Unfortunately, while the internet has given people easy access to vast amounts of information, it does so without any verification that the information published is true.<\/p>\n\n\n\n

The problem is compounded by those who read something inaccurate and then repeat it elsewhere. This makes the false information seem more valid because it is corroborated by another source, which, in fact, is just repeating something that was wrong.<\/p>\n\n\n\n

That is why it is so important to verify financial planning information you read with an authoritative or trusted source.<\/p>\n\n\n\n

Let’s start with the basics. You may pay taxes on the interest earned on savings bonds each year as the interest is earned. No one does this, but you theoretically could.<\/p>\n\n\n\n

When cashing in savings bonds you DO have to pay taxes on the interest. Before you freak out, make sure you grasp the full meaning of that sentence. You pay taxes on the INTEREST ONLY, not on the amount you get from cashing in the bonds. That is a return of principal.<\/p>\n\n\n\n

For example, if you cash in savings bonds and get $1,000, you only pay taxes on the part of that $1,000 that is interest. Depending upon how long you had the savings bonds, which might be just a few dollars. However, you definitely don’t want to incur any penalties for not cashing matured savings bonds.<\/p>\n\n\n\n

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To calculate how much taxes you owe when cashing in savings bonds, take the amount of money you get from cashing in the bonds and subtract the amount of money paid to buy the savings bonds.<\/p>\n\n\n\n

Unless you have a big dollar amount of savings bonds, or they are over 20 years old, chances are the interest is a fairly small amount. After all, interest rates have been very low for the last decade or so, so you weren’t racking up huge interest on those savings bonds.<\/p>\n\n\n\n

There is a savings bonds calculator at TreasuryDirect that will tell you how much your bonds are worth, how much they were purchased for, and how much interest they have earned. Just enter the serial numbers and other information from your bonds to look them up. You only pay taxes on the interest.<\/p>\n\n\n\n

So, if you got $1,000 EE Savings Bond in April 2010, and it is now November 2020, then the bond was issued at $500 (you buy EE savings bonds for half the face value), and it has earned $67.60 in those 10-plus years. You owe taxes on only $67.60, not the other $500. For people in the 20% tax bracket, that’s just about $13 worth of taxes. <\/p>\n\n\n\n

In other words, unless you have a lot of savings bonds, or have held them for decades, there just isn’t any real reason to be worried about the taxes on your savings bonds.<\/p>\n\n\n\n

How To Avoid Taxes On Savings Bond Interest<\/h2>\n\n\n\n

For taxpayers below the income phaseout, savings bond interest on Series EE bonds issued after 1989, or Series I bonds<\/a>, is tax-free if the bonds are redeemed in order to pay for higher education, or in order to contribute to a 529 plan<\/a>. This is a great tax avoidance strategy for almost anyone who meets the income limits. Keep the proper records and savings bond interest is tax-free for every year you have kids in college, or when you contribute to a 529 plan. Just keep records. The amount invested in a 529 plan or paid for higher education must equal or exceed the amount of interest you take tax-free and must occur in the same year. The IRS provides an optional Form 8818 to ensure proper record keeping. You do not file Form 8818. You just keep it in case you are audited. To claim the savings bond interest exclusion, file Form 8815, Exclusion of Interest from Series EE and I Bonds Issued after 1989 <\/em>and attach it to your return.<\/p>\n\n\n\n

To qualify, the bonds must be in your name, or the joint name of you and your spouse if you file jointly. You cannot claim this exclusion if the bonds are held in a child’s name, or jointly in the child’s name.<\/p>\n\n\n\n

You can find IRA Contribution Limits for 2022 and 2023 here<\/a>.<\/p>\n\n\n\n

You Owe Taxes On Matured Savings Bonds<\/h3>\n\n\n\n

Which brings us to IRS Publication 550 – Investment Income<\/strong> (that, my friends, is an authoritative source) and a popular, but dead wrong tax-savings strategy.<\/p>\n\n\n\n

U.S. savings bonds<\/a> are a safe, and therefore low-paying, investment issued directly by the United States Treasury Department. Grandmothers have been giving their grandchildren savings bonds since World War II. In fact, a lot of people have amassed a bunch of savings bonds in safe-deposit boxes, and even shoeboxes, over the years.<\/p>\n\n\n\n

Savings bonds are easy to buy directly from the government<\/a> at the TreasuryDirect.gov website (dot gov — not dot com).<\/p>\n\n\n\n

Savings bonds mature after a certain number of years. The popular EE Series Savings Bonds<\/strong> stop paying interest after 30 years, when the savings bonds reach maturity. All savings bonds stop paying interest when they reach final maturity. But something else happens when savings bonds mature: the taxes become due on the interest. If you don’t pay, there may be penalties for cashing mature savings bonds without having paid taxes on the interest when it was due.<\/p>\n\n\n\n