Taxpayers need to explore options on savings bonds, t-bills

November 15, 1990|By Julian Block | Julian Block,Chicago Tribune

It is none too soon to review what actions you should take before the year ends to lessen the amount that winds up with BTC the tax collectors. What follows are some reminders on ways to time the reporting of interest from United States Savings Bonds or Treasury Bills to your best advantage.

U.S. SAVINGS BONDS: You have several options. One is to declare the interest from U.S. Series E or EE bonds as it builds up each year without cashing in the bonds. Alternatively, you can delay reporting the interest that has accumulated until you cash in the bonds. This deferral break provides you with some valuable leeway in reporting your interest; with careful planning, the deferral can become the equivalent of an exemption from taxes.

Example. You need to redeem some bonds to cover various expenses. Consider whether you want to report the income this year or next, when you plan to retire and your tax bracket is likely to be much lower. Then time your collection trip to the bank accordingly, either before or after Dec. 31.

To illustrate the possible savings, suppose you are now in the 28 percent tax bracket, but will be in the 15 percent bracket next year after you retire. You plan to cash in bonds at that time and use $3,000 of the accumulated interest for a post-retirement trip early next year. If you forget the calendar and cash them this year, the IRS takes $840 and you keep $2,160. If, however, you bide your time until after Dec. 31, that tactic trims the tax tab to $450; you keep $2,550. And if your tax bracket plummets to zero, you keep the entire $3,000.

TIP. Starting in 1990, there is an exemption from taxes for some individuals on interest from EEs cashed in to pay educational expenses. The interest-exemption break is for bonds bought after 1989 by persons who are at least 24 years of age and cashed in by them during a year when they pay tuition and fees at colleges and universities for themselves or children for whom they can claim dependency exemptions. You get no break for EEs purchased in the name of a child under the age of 24 or redemption proceeds used to pay charges for room and board. Moreover, there is only a partial exemption when adjusted gross income is between $60,000 and $90,000 for joint filers and between $40,000 and $55,000 for singles and heads of household, and no exemption when income surpasses the $90,000 or $55,000 figures.

TREASURY BILLS: There is an easy way to move some interest income out of this year and into the next one. Just switch funds from, say, money market mutual funds or bank accounts, which generate interest that is reportable this year, to Treasury bills with maturity dates beyond Dec. 31. T-bills are available with maturities of three, six or 12 months.

Your return is the difference between what you pay for the bill, which is sold at a discount from its face value and the full face value that you receive at maturity. The cash that you get back shortly after you buy the bill is a refund on the purchase price, not income. The discount, or interest, does not count as reportable income until maturity. Moreover, like interest on other U.S. government securities, T-bill interest, though subject to federal taxes, is completely exempt from state or local taxes.

NEXT: Taxes and the sale of your home.

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