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Tax Advantages of Series I Savings Bonds

mansmiling26246769.jpgThe biggest benefit that you are going to experience when it comes to Series I Savings Bonds is that they are not subject to any state or local income taxes. This is a huge benefit for most people because when they redeem their Series I Savings Bond after 30 years they have to claim the income on their taxes, this is in addition to any income that they have earned throughout the year. In some cases, having to claim this extra income puts people into a higher tax bracket for the year, which means they have to pay out more money in taxes. By not being subjected to state or local taxes this means you get to keep more of the money for yourself. The Series I Savings Bond is subject to federal taxes though, but only on the interest that is being earned.

When it comes to paying the federal taxes that are due on your Series I Savings Bond, you have two methods to choose from, the cash method, and the accrual method. If you opt for the cash method, you will get the benefit of not paying any taxes on your Series I Savings Bonds until you redeem the bonds, which can be before they mature, when they mature, or after they have matured. The cash method works because you are allowed to defer your interest income for at least 30 years. If you opt for the accrual method, you will simply pay the federal taxes on them as they come due each year. For example, if you earned $50.00 in interest for the year you will pay the federal taxes on the $50 interest that was added back into your investment. The benefit of doing it this way is when you redeem the bond you will not owe any taxes because they have already been paid.

When you own a Series I Savings Bond, you can also get out of paying any taxes on the interest that you have earned not even federal taxes. The only way that you can do this is to use your Series I Savings Bond to pay for qualified educational expenses, but you must also meet the income limits. There are a variety of educational expenses that are covered; among them are tuition and fees or expenses paid for any course that is required for your degree program. The cost of your books and room and board do not qualify as qualified expenses. If you are electing to use your Series I savings Bonds to pay for qualified educational expenses you must make sure you meet the following guidelines.

  • The bonds must have been purchased after 1989.

  • You have to pay for the qualified education expenses in the same tax year that you cashed in your Series I Savings Bonds.

  • You must be 24 years or older on the 1st day of the month that you bought the bonds in order to use them for paying for the educational expenses. For example, if you didn't turn 24 until the 15th of the month that you bought the bonds in you will not be able to qualify for the tax break.

  • If using the bonds to pay for the education of a child or other minor that you claim as a dependent you and/or your spouse must be listed as the owners of the bonds, you can name the minor child as the beneficiary, but not as the owner.

  • You and your spouse must file a joint return if you are married to receive the tax benefits.

  • The college, university, or vocational school must meet the federal assistance standards.

The last thing that you need to know about using the Series I Savings Bonds to pay for your educational expenses is that the tax benefits will be reduced by the amount of any scholarships, fellowships, employer-provided educational benefits, or other tuition reduction programs. You must also use both the principal and interest to pay for the expenses, if your expenses are less than the amount of the principal and interest for the tax year you will have to pay federal taxes on the amount that is left over.

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