The interest on these bonds is tax-free if spent for eligible higher education expenses since they are backed by the full faith and credit of the United States government. In addition, interest on Series EE and I savings bonds is normally tax-free in most states.
How can I save money on savings bonds without paying taxes?
Cashing your EE or I bonds before maturity and using the money to pay for education is one strategy to avoid paying taxes on the bond interest. The interest will not be taxable if you follow these guidelines:
- The bonds must be redeemed to pay for tuition and fees for you, your spouse, or a dependent, such as a kid listed on your tax return, at an undergraduate, graduate, or vocational school. The bonds can also be used to purchase a computer for yourself, a spouse, or a dependent. Room and board costs aren’t eligible, and grandparents can’t use this tax advantage to aid someone who isn’t classified as a dependent, such as a granddaughter.
- The bond profits must be used to pay for educational expenses in the year when the bonds are redeemed.
- High-earners are not eligible. For joint filers with modified adjusted gross incomes of more than $124,800 (more than $83,200 for other taxpayers), the interest exclusion begins to phase out and ceases when modified AGI reaches $154,800 ($98,200 for other filers).
The amount of interest you can omit is lowered proportionally if the profits from all EE and I bonds cashed in during the year exceed the qualified education expenditures paid that year.
Is it possible to pay off student loans with savings bonds?
Unless you redeem a bond within the first five years after its issuance, there is no interest penalty. As a result of the early redemption penalty, you will forfeit the last three months’ interest earnings. Although the government makes an exception for disaster victims, savings bonds cannot be redeemed in the first year of issuance.
The education tax deduction involves income limits and restrictions for how savings bonds must be registered, in addition to naming what counts as a higher-education expense. On TreasuryDirect’s “Education Planning” page, you may learn more about it.
How do you cash in your college savings bonds?
Savings bonds must first be sold or redeemed before being rolled into a 529 plan. The money will not be taxed as long as it is deposited into a 529 plan within 60 days. 3 When submitting your taxes, make sure to include Form 8815.
Is it possible to pay off student loans with EE savings bonds?
Series EE savings bonds are among the greatest savings accounts for a grandchild since they are low-risk and guaranteed to double in value in 20 years. Savings bonds can be used for education or to pay off student loans if Mom and Dad keep them safely stashed away for years.
Each year, Series EE bonds pay a tiny, consistent amount of interest. If you’ve received an EE savings bond for education or another future expense, you can use the TreasuryDirect calculator to determine how much it’s worth.
Your EE bonds may be useful in helping you pay for college. You could also explore transferring mature savings bonds to a 529 college savings plan or another vehicle that offers higher yields than the EE series. If you go that way, you won’t lose all of your tax benefits because 529 plans have their own set of benefits.
Interest rate on savings bonds vs. interest rate on student loans
Simply explained, the holder of a Series EE savings bond earns income, but the borrower of a federal or private student loan pays interest.
While Series EE bonds pay 0.10 percent interest, government loans have interest rates ranging from 2.75 percent to 5.30 percent for the 2020-2021 school year, with private loans typically charging much higher rates. That implies that even if you make money on EE bonds, it won’t compare to the amount of interest you’re paying on your student loans.
If you’re thinking about using your savings bonds to pay off student debts, keep in mind that they’ll only cover a portion of the cost. This is due to the fact that the interest rates on government and private loans are substantially higher than the amount you receive on your education EE bonds. You’ll almost certainly be assessed a penalty if you cash in savings bonds that are less than five years old.
According to conventional knowledge, paying off higher-interest loans first and then moving on to lower-interest loans is the ideal strategy. When using savings bonds to pay for college, it’s a good idea to pay off private loans first because they have the highest interest rate. Then, with any bond money left over, you can begin repaying your federal student loans.
What is the federal savings bond tax rate?
Divide the bond’s interest earned by your federal tax rate. If you earn $1,200 in interest on a Series E bond and your tax rate is 28%, your tax on the bond will be $336, or $1,200 twice.
What is the tax rate on a savings bond?
- Interest earned on EE US savings bonds is taxed at the federal level, but not at the state or municipal level.
- The amount that a bond can be redeemed for over its face value or original purchase price is the interest it earns.
- The interest on savings bonds is subject to federal gift, estate, and excise taxes, as well as state estate and inheritance taxes.
Should I sell my savings bonds to clear my debt?
If your bond has reached maturity and is no longer collecting interest, don’t put it off cashing it in.
You’ll miss out on some long-term returns if you need to redeem your savings bond early, but you’ll still collect more than the face value. In times of financial hardship, experts agree that cashing in your bond is preferable to early withdrawals from your 401(k) or taking on debt.
Are my bonds tax-free?
- State and municipal taxes are not levied on Series I savings bonds. You won’t have to pay state or local taxes on the interest income you earn if you invest in Series I savings bonds. That means you’ll have more money in your pocket at the end of the year than if you owned a traditional bond.
- Federal taxes apply to Series I savings bonds. The interest income you generate while holding I bonds will be taxed by the federal government. This is because they are a “zero-coupon” bond, which means that you won’t receive regular checks in the mail; instead, the interest you earn is added back to the bond’s value, and you’ll earn interest on your interest.
What can you do with a savings bond?
Savings bonds are a type of government debt that is offered to citizens of the United States to help support federal spending. Savings bonds are purchased at a discount and mature at their full face value, but they do not pay regular interest.
Is it true that Series EE savings bonds are tax-free?
- One of the most significant advantages of Series EE savings bonds is the tax exemption they receive from state and municipal governments.
- When you buy Series EE savings bonds for college, you can deduct part or all of the interest you earn over the years from your income taxes when you redeem the bonds.
- You can also deposit the Series EE savings bonds in the name of the child with the parents designated as the beneficiary when investing for school (not co-owner).