Federal income tax brackets

I cashed in a large amount of EEBonds (5-13-08) to reinvest and changed my minds. Can the money still be rolled over into HH bonds and not be taxed for all this year? I will be 75 this year and have not had to pay tax at all for last 5 years. Please can you help or tell me who to talk to?

Carl - You can't change your mind about cashing Savings Bonds. Even so, your bigger problem is that HH bonds were discontinued in 2004.

Tom Adams

$26,500 HH bonds had to be redeemed this year. I received $1060 (4%) per year and paid income tax each year on that amount. Now I am told I will have to pay income taxes on $22,532 deferred interest. I never saw a penny of that money. Does this seem fair? As a retired widow of 79 yrs. I find it more difficult each year to meet expenses, much less an unexpected tax on $22,532. Do I have any choice?

Hi Dixie - actually you did see the money when they paid you the $26,500 for the HH bonds. What they're saying is that of that amount, $22,532 was interest earned and $4,000 was the original investment.

Taxes have been deferred on the interest for decades (in fact, you've been earning interest on the deferred taxes) and now the tax is due.

You need to set aside a portion of the $26,500 to pay the tax with. Since you're retired, the tax rate will be quite low compared to what others have to pay. There are no other options.

Tom Adams

My father in law passed in Dec 08 and left a lot of H bonds. Can I delare the deferred interest on his 08 return and reissue?

Carl - This would involve changing your father's treatment of his Savings Bond interest from the normal accrual method to the cash method. Unfortunately, this isn't allowed with Series H or HH Savings Bonds. So, no, you can't put the taxes on his return. You can, of course, have the bonds reissued to his heirs.

Tom Adams

I have some bond I would like to cash but I am unsure of the amount of taxes I will have to pay. Could you explain to me how much interest or $ amount of the bonds I would have to cash before I need to file a 1099 form?

Christa - the amount of tax you have to pay depends on your other income, as shown in the tables on this page.

A 1099 is something your receive, not something you fill out. You will receive one after you cash your bonds. It tells you (and the IRS, which gets a copy) how much interest to add to your next tax return. The actual amount of tax you'll pay depends on your filing status and taxable income.

Tom Adams

Let me make sure I understand this. My husband and I will make $45,500 each ($91,000 combined) in 2009. So our federal tax bill will equal $18,777 or $9388 each. But if we get divorced (still living together) each claim one of our two kids so that we both can file as "single head of household", then our total tax bill would be $10,064 or $5032 each. We can save a total of $8713 each year just by getting divorced??

Patty - if you were still living together you couldn't both be heads of the household. You'd have to have two households.

Also, something is off in the way you calculated the taxes. Here's how to calculate it, with the understanding that tax rates are based on your taxable income, which is less than your total income but varies from family to family. So what someone actually paid would be less than these examples:

If you're married, the bill comes to:

$1,670 (10% on the first $16,700)
$7,680 (15% on the next $51,200)
$5,775 (25% on the next $23,100)
-------
$15,125 Total

In your example where you're each head of a household:

$1,195 (10% on the first $11,950)
$5,033 (15% on the next $33,550)
-------
$6,228 Each
-------
$12,455 Total

So you'd save $2,670 on taxes, but you'd have to set up two households.

Tom Adams

I have $25000 worth of EE bonds from the 80's and just went back to grad school. While I dont need the money, it seems to me it would make sense to cash them all now while I'm making nothing, rather than cash them in a few years when I'll be working…… due to the tax brackets described in this article. Saving 10% Fed taxes on 20-27 yrs worth of interest seems much more important than State tax exemption over the few remaining years. Does this sound reasonable??

John - Yes - you have a one-time get out of tax free card. Whenever your rates are low it's a good time to roll over your investments and pay the tax.

You might also qualify for the Savings Bond education deduction. Check it out.

Tom Adams

Tom,
I just cashed several EE and I bonds for my two children, ages 18 and 15. The bonds were all in their names and with their social security numbers. I divided the money evenly and deposited each amount into their individual savings accounts. They are both still in high school and do not have jobs. Will they or I still have to pay the taxes on these cashed bonds?

Linda - if they have no other income than the Savings Bond interest, it depends on how much interest they earned. For the 15-year-old, but not the 18-year-old, you might have to add the income to your own tax return if it amounts to a lot of money. See tax law change impacts kiddie tax for more information.

Tom Adams