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

I am currently a college student and I had cashed in some series EE bonds this past year, and after taking a quick look at your bond fact sheet it led me to believe that I am exempt from paying taxes on the interest I have earned on the savings bonds. Is this true and if there are stipulations to this what are they?

Josh - the fine print of that deduction is here. The deduction is meant for parents, not students - notice the detail about how old you have to be when the bonds were purchased to get the deduction.

Tom Adams

My mother does not file income taxes. My brother died and left her several saving bonds. She received from the bank statements that list the interest on these bonds. What should do?

Linda - You don’t say why your mother doesn’t file an income tax return, but I’ll assume it’s because her income is too low. Depending on how much interest she collected from the bonds, it may still be too low to have to file a return, or she may have to file a return and pay some tax on the interest.

The IRS instructions explain the income levels at which you need to file a form and pay taxes. If you don’t understand them, get some help.

Tom Adams

Tom - My mom has $20,000 worth of savings bonds. Mostly EE bonds I think. She would like to reissue these bonds to me and my sister. Would either my mom, my sister, or myself have to claim the interest as income?

My mother who is in her mid 80’s cashed in 2 EE Savings bonds in 2009 and received $8,000. She was told they were tax free. She hasn’t filed taxes for the last 5 years because her income is too low. Does she need to file a federal tax return for 2009 because of these cashed out bonds which were purchased in the 70’s? Her total income is around $13K from interest, dividends, etc.

Chris - If she adds you as a co-owner of the bonds, there would be no tax implications. If she makes you the owner and removes her own name, then she has to pay the tax on the interest earned up to the day of reregistration.

Sue - This is a tax question, not a Savings Bond question. You should consult a tax advisor for an answer to your question. Whoever told her the interest was tax free gave her bad information. In any case, the tax will be quite low because her income is so low, but if she’s already spent the money it could be a problem for her.

Tom Adams

My sister had no income for 2009, but she cashed in some savings bonds to purchase a new car. Does she need to file taxes this year?

Thanks!

Victoria - It depends on how much interest income she got from the bonds and what her filing status is. The answer is in Table 1-1 on page 9 of IRS Publication 17.

Tom Adams

My uncle passed away nearly four years ago, and only my cousin and I are remaining heirs. We were appointed co-administrators of his estate, which has already gone through probate. My question is this: there was a considerable amount of savings bonds in the estate, mostly E and EE, that resulted in a considerable amount of interest, obviously.

My question is this: given that the estate is still open until the end of the month, and the redeemed bonds have since been cashed (half in 2009 and half thus far in 2010) and dispersed equally among my cousin and myself, does the interest that was earned get reported by my uncle’s estate or by my cousin and myself on our own respective returns.

I’ve been told different conflicting stories that the tax rate for redeemed bonds is much lower if it’s applied to the return of the estate, rather than to the returns of the heirs that are the beneficiaries.

Someone told me that because the estate had no other income other than the bond interest, and that there were expenses associated with the eventual disbursement and closing of the estate (including lawyer fees), that the interest on the savings bonds will be taxed at 11 percent rather than the 25 or 28 percent bracket my cousin and I find ourselves in.

Someone else told my cousin that the estate will be taxed up to 35 percent on the savings bond interest, even though there was no other income.

Also, the 1099 interest form was sent to the estate.

Lastly, since we only cashed half the bonds in 2009, with the remainder this year, will the estate then have to be kept open until next year to pay the interest on the bonds cashed in 2010?

Can you please advise, Tom? We are desperate for the right answer. Thank you.

Jerry - Although this seems like a Savings Bond question because the income came from Savings Bonds, it’s actually a tax question - the answer would be the same no matter where the income came from.

Thus you would be much better off asking someone with experience in how estates are taxed than asking me.

However, just going by the tables above, it looks to me like the estate’s tax rate is going to be higher than yours as individuals. But again, I’m not an expert in this area and you should consult someone who is.

Tom Adams

My grandmother cashed in 125 ee and I bonds. The interest was over $150,000 dollars. She is 101 years old and a widow of a disabled veteran.

She has no other income other than @ $10,000 per year in soc. sec.. Tax man said she owed over $29,000. She lives in Indiana, so I don’t know what the state tax is, however, I think what the tax man figured is too high … am I right? You did say that the tax paid from the redeemed bonds is not capital gains tax but rather deferred tax? So does that mean she falls under the 28% tax bracket?

Is interest paid on bonds considered gross income?

Gene - Savings Bond interest is called ordinary income. Gross income is all sources of income added together and the Savings Bond interest would be part of that.

If her income was $150,000 and her tax was $29,000, that’s only 19.3%. Her marginal tax rate was 28%, but the IRS only charged that much on the portion over $82,250, assuming she filed as a single person.

So this all sounds about right to me, but I wish everyone with that much money invested in Savings Bonds would spend a weekend reading , as it would save them lots of money.

Tom Adams

I received a 1099 for the interest gained on my mother’s federal savings bonds which were part of her estate. The ID number was issued by the Indiana Probate Court. What number do I use when paying the taxes and do I have to use a special form?

Sister - I’m not sure what you mean by ID number. If you mean your Social Security Number, then it should be on the 1099 you received and also on your tax form. If that’s not what you mean, I need more information.

In any case you don’t need a special tax form for the IRS.

On your state tax form, however, you can deduct the Savings Bond interest from your income (states can’t charge income tax on interest from the federal government). That may require a special form, depending on how your state handles this.

Tom Adams

I have 21 Series E US Savings Bonds ($50 each) purchased throughout 1979 using GE Company contributions under the GE Savings & Security Plan. These bonds were delivered to me in January 1983 following a 3 year holding period, accompanied by a statement of their “owner’s cost for tax purposes” (equal to their redemption value on the delivery date). Since their redemption will result in a 1099 for their full accrued interest, how do I get credit for their tax basis when received, which was higher than the $37.50 price that the 1099 will assume?

P - Sorry, I have no idea. I’ve never heard of this. I suggest you contact the GS’s retiree assistance center for help.

Tom Adams

My daughter and I are both listed on 20-year-old Series E bonds given as gifts when she was a baby. She is in graduate school and will have no other income in 2010. If she cashes face value $5,000, does she need to pay any taxes?

Sid - Whether she would need to pay taxes depends on a large number of factors, such as how much other income she has, whether anyone claims her as a dependent, and how much interest the bonds have actually earned. I don’t think anyone can answer your question without getting the facts and running the numbers.

Tom Adams

My grandfather purchased 5 EE savings bonds for $5,000 each in the late 90’s and early 00’s. I was listed as the beneficiary, to receive the funds upon his death. Now I know that they are not fully mature yet, but he wants to give me the money they are worth thus far to help me in buying a house. So a couple questions, is it possible to have the taxes made my responsibilty rather than him, if we were to have the bonds reissued in my name and then I redeem them? Or should he redeem them himself and then “gift” me the money. If I do have them reissued and redeem them, do I then need to claim the total amount as income rather than just the interest made on the bonds? What do you think would be the best option?

Jennifer - having them reissued to you is a taxable event for him and doesn’t gain you anything.

He should cash the bonds, hold back what he needs for the taxes, and give you what’s left.

Tom Adams

I have just completed graduate school and my last offical tution payment was in Jan 2010. I just remembered I have a few thousand dollars in savings bonds and I would like to cash them and get the savings bond education deduction (just learned about it). The only problem is I have just graduated and my last tution payment would have been before April 2010 so on my last tax year (2009).

Is it possible to cash in my savings bonds tax free with the savings bond education deducation even though my last/final tution payment was in Jan 2010? If not, can I get this deduction if I use it to pay for a federal stafford loan? Thanks for your help.

Chris - the info you’re looking for is here.

Tom Adams