Ibonds: Can I Start Paying Taxes On Interest In Year 20 Of A 30 Year Ibond, Just Going Forward

Ltssharon
  |     |   64 posts since 2020

I have paper ibonds. I bought them in 2001, 2002, and 2003. I have never paid any taxes on the interest they earn. I never thought about it before this. NOW, starting in 2022, is there 1) a way for me to begin paying taxes on the interest for THIS YEAR ONLY, as well as ALL YEARS going forward, and 2) if yes, then in the year when each of them matures,would the treasury send me a 1099 form to pay taxes on the interest the maturing ibond earned, between 2000, 2001, and 2002 and maturity? I realize I only will be paying federal taxes. I have looked everywhere I could think of on the website, and i do not see any place that gives me tax payment options. I don't want to mess this up, because what I do here will affect how much I plan to withdraw from retirement accounts. I want to spread out my income over years to stay in the best income bracket.

This year I opened some online ibond accouns and registrations. Maybe I wasn't paying attention, but I don't recall checking any thing about taxes.



Answers
alan1
  |     |   684 posts since 2015
The answer to your question re reporting interest can be found in IRS Publication 550, "Investment Income and Expenses". Please pay particular attention to "U.S. Savings Bonds", which begins at page 7 of the PDF at https://www.irs.gov/pub/irs-pdf/p550.pdf

At page 7 of the PDF, a section of especial relevance is "Reporting options for cash method taxpayers", particularly the subsection "Change from Method 1".

"Method 1" is "Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature."
"Method 2" is "Choose to report the increase in redemption value as interest each year."

from "Change from Method 1":
"If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change, you must report all interest accrued to date and not previously reported for all your bonds."
(emphasis added)

N.B. "all your bonds"
Sylvia
  |     |   335 posts since 2012
alan1, thanks for your generosity and endless patience in indulging our myriad questions on U.S. bonds. The U.S. Treasury should have you on its payroll for all the service that you provide here on its behalf. Were there a tip jar, yours would no doubt be overflowing.
blazer9
  |     |   176 posts since 2019
I am thinking about getting these I Bonds but the talk of Taxes part isn't obvious to me.
I had 30 yr old EE Bonds given to me and they matured last year and the 25000 of interest and might be penalties murdered my usual easy tax return.
What kind of reporting ( month or year ) $ interest would the now available 7.12
Bond be subject to? Say $1000 Bond
alan1
  |     |   684 posts since 2015
blazer9 -- In addition to the material cited, linked, and quoted in my earlier comment (from IRS Publication 550 available at https://www.irs.gov/pub/irs-pdf/p550.pdf), please read "Tax Considerations for I Bonds" available via the Treasury Direct Research Center at https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm

In particular, pay careful attention to the section denominated "When must I report the interest on my tax form?", which states:

You have a choice. You can

.report the interest every year
.put off (defer) reporting the interest until you file a federal income tax return for the year in which the first of these events occurs:
.you cash the bond and receive what the bond is worth, including the interest, or
.you give up ownership of the bond and the bond is reissued, or
.the bonds stops earning interest because it has reached final maturity
(italics added)

Reporting the interest all at once at the end

Most people defer reporting the interest, putting it off until they are filing a federal income tax return for the year in which they receive what the bond is worth including the interest.

When electronic I Bonds in a TreasuryDirect account stop earning interest, they are automatically cashed and the interest earned is reported to the IRS.

You can see the interest on your IRS Form 1099-INT.

.If a financial institution pays the bond, you will receive a paper 1099-INT from that financial institution either soon after you cash your bonds or within the first two months after the end of the year in which you cash your bonds.
.If you cash electronic bonds in your TreasuryDirect account, your 1099-INT will be available early the next year in your account. (Video)

Reporting the interest every year

You may, however, choose to report the interest every year.

You may, for example, find it advantageous to report interest every year on savings bonds in a child's name. The child may be paying taxes at a lower rate than will be true years later when the bond matures.

Note: You (or the child if a bond is in the child's name) do not actually receive the interest every year even if you report it that way. The interest that the bond earns is reported on a 1099-INT after the bond is cashed or is reissued to reflect a taxable change in ownership. The 1099-INT will show all the interest the bond has earned over the years. Go to IRS Publication 550, Investment Income and Expenses, for instructions on how to tell the IRS that you already reported some or all of that interest in earlier years.

Once you start to report the interest every year (for example, for a child in the child's Social Security Number), you must continue to do so every year after that for all your savings bonds (or, for example, the child's bonds) and any you acquire (or, the child acquires) in the future.
[alan1 interpolates: But see IRS Publication 550, p. 7, re how to change the reporting method]

Our online Savings Bond Calculator can also help you determine the year-to-date earnings for the calendar year.
How do I report the interest?

Whether you are reporting interest at the end of the bond's life or every year, you report the interest from your bonds on your federal income tax return on the same line with other interest income.

If you are reporting the interest on bonds another person owns (for example, the interest on your child's bonds), you report that on the other person's federal income tax return with other interest income that person has earned.

If you choose to report interest every year, after the bond is cashed, the 1099-INT will show all interest earned from date of issue. See instructions in IRS Publication 550 on how to report interest in this situation on your federal income tax return.
(end of quote)

N.B. It is not a question of how you report interest on the "now available" bond. It's how you report interest on your savings bond holdings.
blazer9
  |     |   176 posts since 2019
alan1
I value and appreciate your taking the Time To answer my question
in a clearly detailed, understandable and pleasant manner.
You're a valuable Screen name poster. Thank-you.
Choice
  |     |   659 posts since 2020
I’m on a cash basis and target my taxes/rate first that I want for each year end. Thus that correlates/coupled with/to bond redemptions, Ira distributions, sole proprietorship income, Soc Sec income, etc that I want during the year for end of year tax calculation  …all part of planning, it is a process. Good luck
Ltssharon
  |     |   64 posts since 2020
Oh thank you again so much. There is so much to remember in life. I will make a note of this in the spreadsheet "details" column I keep up to date. It is very very important, because I am older and it is likely my kids would inherit these and not have a clue with out notes in my "details" column.
GreenDream
  |     |   188 posts since 2019
In addition to what alan1 wrote, keep in mind that (under the default deferring of interest) you don't have to wait until the 30 years are up to cash out and pay all the interest at once. you can choose to cash out at anytime after the first year (though there is a penalty of 3 months interest if you cash out before 5 years) and thus spread the taxes over multiple years by redeeming over multiple years.

Keep in mind that while paper bonds can't be split, electronic bonds can - IE you can redeem a portion of the bond (minimum $25 redeemed, and leaving a minimum of $25 in the bond) rather than the entire bond - Redemptions are comprised of principal and interest see:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm
Ltssharon
  |     |   64 posts since 2020
if I have a 2000 ibond and redeem 1000, do i receive A) the 1000 principal plus interest on 1000, or receive B) the 1000 principal plus interest to date on the 2000 bucks?

Thankyou.
alan1
  |     |   684 posts since 2015
from Treasury Direct Research Center, "Cashing (Redeeming) Series I Savings Bonds":

How much can I cash at one time?
Electronic bonds in TreasuryDirect

You can cash a minimum of $25 or any amount above that in 1-cent increments. If you cash only a portion of the bond's value, you must leave at least $25 in the TreasuryDirect account. Redemptions are comprised of principal and interest. (In a partial redemption, we pay interest only on the partial amount you cash.)
(emphasis added)

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm
blazer9
  |     |   176 posts since 2019
I've decided to give these I Bonds a try'
Did the form 4868 extension plus over-pay, waiting for confirmation of funds w/d.
Waiting to file with the form 8888 allocation.
Did the U. S. Treasury Account, thinking if all in 10K amount or not.

How much time do I have to put in my buy, in either accounts? for the rate?
My baptism by fire. I just have the heebie jeebies concerning the interest reporting.
Asking for Guru Wisdom here.
Choice
  |     |   659 posts since 2020
Don't understand the $10k amount Blazing...but $5K max ibond paper refund for individual or joint tax return
blazer9
  |     |   176 posts since 2019
You Can buy at the US Treasury ? 10K?
Get same 7.12?
alan1
  |     |   684 posts since 2015
excerpted from Treasury Direct "Series I Savings Bonds" section "at a glance"

Current rate: 7.12% for bonds issued November 2021 - April 2022
Minimum purchase: Electronic bond: $25
Maximum purchase (per calendar year): Electronic bonds: $10,000
https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

If you wish to obtain electronic bonds with an issue date of March 2022, I would suggest that you schedule your purchase for a few days prior to the last business day of the month.
blazer9
  |     |   176 posts since 2019
alan1 Thanks again.
There have many valuable postings in a couple of these
forums about I Bonds ect.
I want to thank all for the guidance and confidence I've been given .
Choice
  |     |   659 posts since 2020
Not with 8888 form…$5k max
milty
  |     |   37 posts since 2018
Is the interest on I Bonds held in your Treasury Direct account only visible after the 6-month compounding intervals?
alan1
  |     |   684 posts since 2015
replying to Milty:

"Interest, if any, is added to the bond monthly and is paid when you cash the bond."
https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

It is not invisible.
GreenDream
  |     |   188 posts since 2019
milty, the only "invisible" interest is the 3-months of interest that you'd lose out on if you cash out before 5 years. That interest only becomes "visible" once you pass the 5 year mark.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

"Note: If you use TreasuryDirect or the Savings Bond Calculator to find the value of a bond less than five years old, the value displayed reflects the three-month penalty; that is, the amount of the penalty has been subtracted already."
milty
  |     |   37 posts since 2018
Thanks, alan1 and GreenDream. Must be that 3 month penalty is why am not seeing any interest posted on my recent I-bond purchase in Treasury Direct.
blazer9
  |     |   176 posts since 2019
I goofed the 5K paper IBond via tax refund route.
From all the guidance I received, everything went Perfectly.
But IRS Form 1040 line 35a quickly killed my chance due to inattention.
At least the 5K is back to funding account. next time :(
Ltssharon
  |     |   64 posts since 2020
Gosh, I am not sure what line 35a was, but I am sorry the paper ibond via tax refund rate was unclear. First times doing anything are so iffy. Thanks for the heads up.
Choice
  |     |   659 posts since 2020
Line 35a requires the total of your refund including in the form of paper ibonds…did you leave it blank or what happened?
alan1
  |     |   684 posts since 2015
Here's the text of line 35a of 2021 Form 1040:

"Amount of line 34 you want refunded to you. If Form 8888 is attached, check here." An arrow pointing to a box appears to the right of the above-quoted text.
page 2 of PDF at https://www.irs.gov/pub/irs-pdf/f1040.pdf

[Line 34 is the total "amount you overpaid".]

The amount of the refund that is to be paid in the form of savings bonds is to be specified in Form 8888, "Allocation of Refund (Including Savings Bond Purchases)". Part II of that form is "U.S. Series I Savings Bond Purchases".
https://www.irs.gov/pub/irs-pdf/f8888.pdf

(I have difficulty with small print, and especially, with little boxes to check. I therefore use Form 1040-SR, "U.S. Tax Return for Seniors". Line 35a appears on page 3 of that form.)
https://www.irs.gov/pub/irs-pdf/f1040s.pdf
Choice
  |     |   659 posts since 2020
Thanks, Alan I somewhat modified earlier post…I’ll try again..Sorry for confusion.If one enters zero on 35a they will get no refund…cash or otherwise. If they want any refund it has to be there. The second part of that line requires one to indicate if 8888 is attached. Line 8 on 8888 must match what is on 1040…if there is no match a check is issued, ie no ibonds!  
Blazing what did you enter on 35a and did it match total on 8888?
alan1
  |     |   684 posts since 2015
Choice -- it's cool. And I have edited my comment to eliminate reference to your original verbiage.
blazer9
  |     |   176 posts since 2019
Folks.....
It was Totally My fault !!!
Tax Program automatically filled in Line 34 & 35a
The BOLD in that line of 35a asked, amount I wanted to be refunded.
If Form 8888 Is attached, Check Box.
I left that line as is. 5113

STUPIDLY I thought to myself, of course I want my refund.
Again STUPIDLY I thought to myself, Don't they SEE that I filed 8888 and I wanted IBonds? Why ask??
They took that LITERALLY Gave me the refund. DANG IT!
I laughed at myself loudly and with tear in my eye.

Murphy's Law. :?
Choice
  |     |   659 posts since 2020
My read would be…if $5k totaled for bonds on 8888 then the balance/refund should/could be $113 for check/direct deposit. In any event I don’t know of treasury making changes after “its done its thing”
alan1
  |     |   684 posts since 2015
blazer9 -- what tax program did you use?

A decent program should have picked up the facts that you were:

a) submitting Form 8888;
b) had indicated on Form 8888 that you wished to purchase paper bonds with a portion of your refund;
c) had not checked the box on line 35a of Form 1040.

A decent program should have alerted you to the incongruity in your submission.
Ltssharon
  |     |   64 posts since 2020
Hi all, Well….along these lines….I go to H&R Block to have my taxes done. I have done so for 15 years. I never mentioned my paper purchased in 2000, 2001, and 2002. So of course now I have stumbled onto the knowledge of interest I will owe. My brother says the H @R block tax man should have alerted me. But how would he know since I never mentioned them. He is not a financial ADVISER. So in the end I believe that the tax man/program is not at all at fault. Sorry for taking a side topic step. But I think it is interesting discussion- staying informed when you just have not a clue. So thanks to all.
blazer9
  |     |   176 posts since 2019
alan1
from my post...
"Tax Program automatically filled in Line 34 & 35a"
(my fault) It was myself who entered 5113 amount on 35a

alan1
from your post
c) had not checked the box on line 35a of Form 1040
I did [x] the box
FUBAR all in.

Actually OLT Free File was easy to navigate 
for the last 3 years.
Choice
  |     |   659 posts since 2020
The confusing part to me (only me?) is the what was actually entered or left blank by blazing on relevant 1040 and 8888 boxes/lines w/o all the “my fault” language which added no value


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