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Home » Jobs & Money » Tax Tips » U.S. Savings Bonds

U.S. Savings Bonds

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Savings bonds are a great way to invest income conservatively. Not only is the bond guaranteed by the United States government, but it also pays interest based on current market rates.

While the interest on these bonds is taxable at the federal level when redeemed, there is one way to avoid it.

First, most of these bonds must be held for at least 6 months before they can be redeemed. However, to get the most out of your investment, I highly suggest holding for a long period of time.

Tax effect
Interest on Series EE savings bonds are also exempt from local and state taxes. To avoid paying taxes on the bonds at the federal level, you may use the funds from the redemption for college expenses for you, your spouse, or your dependents.

Therefore, an effective tax strategy for parents is to gift savings bonds to their children when they are young. This not only allows the savings bonds to mature and grow interest, but it also prevents the interest from being taxed if it is redeemed to go towards college expenses.

Finally, if the funds redeemed are not used toward college expenses, then the income is reported along with your other interest income on your tax return — if it is less than $1,500. If the income from the bonds is greater than $1,500 then it is reported separated on a Schedule B for filers using form 1040.

If you do plan on using the income for college expenses, then you also have 2 choices on how to report the interest income. First, you can report the incremental increase on your tax return each year. Or second, you can report the total interest income upon redemption.

David
David

I’m a Financial Consultant and Personal Financial Representative with experience in financial analysis, strategic planning, presenting, & financial advisory services.

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Filed Under: Jobs & Money, Tax Tips Tagged With: gifts, investments, Spousal issues, Taxes 101

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LynnetteWith input from Financial Advisors, (a Tax Accountant and an Investment Manager), I share helpful tips regarding money and finances -- including debt relief, insurance, budgeting, and investing for retirement. My goal is to help you save more, spend less, and invest for the future by sharing honest, tried & true budgeting tips and tools. When I'm not saving for the future and helping others save for theirs, you can find me at the corner of Good News & Fun Times as publisher of The Fun Times Guide (32 fun & helpful websites).

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AndreaI have been a certified tightwad striving for financial freedom since I became pregnant with my first child -- and I decided to find a way to stay home with him full-time. I enjoy sharing my personal experiences in my journey back to financial health and planning for a future -- which will include sending 2 kids to college and early retirement.

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