Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. There are different types of bonds; however, I am narrowing my focus to the Series EE and Series I U.S. Savings Bonds.
Series EE U.S. Savings Bonds are an appreciation-type (or accrual-type) savings security. Series I U.S. Savings Bonds are inflation-indexed. According to the U.S. Treasury, starting Jan. 1, 2012, you can no longer buy paper savings bonds at financial institutions. But you can go online to purchase the two types of electronic savings bonds mentioned above.
Savings bonds are a popular birthday and graduation gift and also can be used toward financing education, supplemental retirement income, and other special events. Unlike other securities, minors may hold U.S. savings bonds in their own name. Savings bonds can be titled jointly or even “payable on death” or “POD” to a person. Furthermore, they can be titled in the name of a Revocable Living Trust. If you already have bonds and want to re-title, you will likely have to relinquish the paper bonds and open a U.S. Treasury Direct account.
You pay no state or local taxes on the interest on the bonds, and you can defer paying federal taxes on the interest until you cash in the bond or until it matures. In addition, tax benefits are available for eligible taxpayers when Series EE and Series I savings bonds are used for qualified education expenses.
The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989, when the bond owner pays qualified higher education expenses at an eligible institution. There are some additional requirements as follows: 1) qualified higher education expenses must be incurred during the same tax year in which the bonds are redeemed, 2) you must be at least 24 years old on the first day of the month in which you bought the bond(s), 3) when using bonds for your child’s education, the bonds must be registered in your name and/or your spouse’s name. Your child can be listed as a beneficiary on the bond, but not as a co-owner, 4) when using bonds for your own education, the bonds must be registered in your name, 5) if you’re married, you must file a joint return to qualify for the exclusion, 6) you must meet certain income requirements, 7) your post-secondary institution must qualify for the program by being a college, university, or vocational school that meets the standards for federal assistance (such as guaranteed student loan programs).
Information contained in this article is courtesy of the following:
- How Often Should I Meet with an Estate Planning Attorney? - January 18, 2018
- Tax Law Changes for 2018 - December 29, 2017
- Dedicated Gardeners & Creative Spaces in Annapolis, MD - May 30, 2017