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09-07-2017 12:23 PM
I have savings bonds that have currently accrued $44,000 in interest on which i have not paid tax and they do not mature until 2030. I cannot decide whether to cash them in a little at a time (maybe $10,000 worth of interest this year, since it will be a lower tax year than next year). My problem is that these are I bonds which are guaranteed to pay at least 3 3/4 worth of interest and they currently pay 6%. Since this substantially higher interest than anywhere else, I am reluctant to cash them in and lose this. But in 2030 my taxable income from just these bonds alone could be about $88,000. My other income would probably be about $25,000 from social security in today's dollars, $14000 in today's dollars mandatory IRA withdrawal.
Really need opinion on which option is better.
09-19-2017 03:34 PM
Welcome to the H&R Block community.
Your best option here, since it seems that you elected not to pay tax until you cash your bonds in, is going to be to redeem them one at a time so that you don't end up with a huge tax bill. That said, if all the income you have at the time you redeem the bonds is social security income then you might be able to avoid being taxed altogether.
If 1/2 of your social security income plus all of your other income is equal to less than the base amount for your filing status then your social security will not be taxable. The base amount for single taxpayers is $25,000 and the base amount for married taxpayers is $32,000. So assuming that you're single, if your social security is $25,000 and your other income totals no more than $12,000 you will not owe more than a couple of hundred dollars in tax (if you end up owing something). In that same scenario, if your other income totals no more than $10,000 you will not owe any tax because your taxable income will be below your filing threshold (the filing threshold for a single taxpayer is $10,350). So if you can redeem a bond each year with no more than $10,000 worth of interest accumulated on it then you will probably avoid paying tax altogether.
If you cash all the bonds in at once your best option would be to take the tax out of the payment you receive so that you don't have to come up with it later. But again, cashing them in one at a time will help you reduce or possibly eliminate your tax on the bonds.
Also note that interest on series EE and series I bonds are not taxable if the bonds are used for education expenses.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)