There's new tax legislation in Congress that is designed to simplify the income tax code, but unfortunately it has a provision that could be yet another blow to the US Savings Bond program. The provision will repeal the deferral of interest on savings bonds. Currently, you don't have to pay federal income tax on Savings Bond interest until you redeem the bond (see Treasury Direct for full details).
Details of this bill are available at Senator Wyden's website, and the provision to repeal the deferral of Savings Bond interest is listed in the offset handout.
Here's a summary of the legislation as described at Senator Wyden's website:
As Congress readies for the inevitable partisan debate over how best to address the expiring 2001 and 2003 tax cuts, U.S. Senators Ron Wyden (D-Ore.) and Judd Gregg (R-NH) today offered a bipartisan solution. The "Bipartisan Tax Fairness and Simplification Act of 2010" takes a comprehensive approach to reforming the tangled web of nearly 10,000 exemptions, deductions, credits and other preferences that currently clutter the U.S. tax code in order to create a simpler and fairer system that American workers and businesses can more easily navigate. By eliminating many of the tax expenditures that benefit narrow special interests, Wyden-Gregg offers fiscally-responsible tax-relief to the middle class and growth opportunities for American businesses to create jobs and compete globally.
In fairness, the bill has some provisions that may help savers. In the two page summary, one of the claimed tax-code enhancements is the restructuring of retirement accounts:
Promotes Personal Savings And Investment – Wyden-Gregg promotes responsible retirement savings and investments by expanding tax-free savings opportunities. The bill consolidates the three existing types of IRAs into a new Retirement Savings Account and a new Lifetime Savings Account so that a married couple will be able to contribute up to $14,000 per year to tax-favored retirement and savings accounts.
I don't know how much support this legislation will receive. You can read more about it at the NY Times and in the Atlanta Journal-Constitution.
The Treasury has already hurt the savings bonds program in the last few years by slashing the annual purchase limits and by setting the I Bond fixed rates at very low levels. Do we need yet another blow to the program?
There's an interesting article at Forbes that looks into the question of why did the Treasury sharply limit I Bond purchases. One possibility that wasn't discussed was the influence from the banking industry. I wonder if that influence was the source of this savings bond provision in this new legislation.
Credit for this find goes to the Savings Bonds Advisor Blog.