Tax Tip of the Week
For the week of October 25, 2004

Make the right tax choices for your U.S. savings bonds

When you own Series EE or Series I savings bonds, you have a tax decision to make. Both types of bond earn interest monthly. Usually, you’ll choose to defer paying any taxes on the interest until the bond reaches final maturity or you redeem it, whichever comes first. At that time, you would report and pay taxes on the total interest earned over the life of the bond. (If you meet certain requirements, you might avoid paying any taxes by using the bond proceeds to pay for higher education expenses.)

The alternative method is to report the interest earned each year as part of your taxable income. Most people choose the first method because it lets you delay paying taxes for as long as possible. But sometimes the annual method makes sense — for example, if a young child has been given a savings bond in his or her own name.

Normally, the tax rate on investment earnings of a child under age 14 is the parent’s marginal rate. This is called the kiddie tax, intended to stop parents from shifting income to their children. But even under the kiddie tax rules, the first $800 of a child’s investment income is tax-free and the next $800 is taxed at your child's lower tax rates. So if your child expects to earn less than $1,600 from savings bonds and other investments, reporting the interest as income each year could make good tax sense.

For further details on this and other tax-saving strategies, please give us a call.

"Tax Tips" are published weekly to provide useful tax information. Return to this site every week for helpful tax-cutting suggestions, tax reminders, and current tax information.

The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax-cutting information from time to time, please contact our office. We're here to help.