I keep my 2001 paper I-Bonds in my safe deposit box. The Treasury Department has reasons to convert them to electronic.
https://treasurydirect.gov/savings-bonds/manage-bonds/convert-paper-to-electronic/
I’m not decided. Is it worth converting the paper bonds to electronic? I will have to eventually because the bank won’t be able to redeem them when they mature (after collecting interest for 30 years).
If so, what is the most secure way to mail them to Treasury (located in Minneapolis)?
Wendy
We have both paper and electronic bonds. Having read the link, I will just say that I will continue to hold those in paper that I can because….
I have some that matured in late November. But 2022 was already a heavy income year coupled with few deductions available. (I’m not obsessive about this sort of thing, it’s just lumpy sometimes, and 2022 was one of them.)
Since I have a slug to cash in, I chose to wait until 2023 to do so, when I know our income will be down and our deductions jump (mostly energy, but others as well.) I figured forgoing the one month’s interest was well worth avoiding the taxation that would be attached if I cashed them in 2022.
I do not want the bonds cashed “automatically at maturity.” There are times when, uh, timing counts.
We converted ours. They show in a separate, linked account online.
We can get a current valuation online, so that’s convenient.
I believe we sent them via registered mail. No issues.
This is really clever! Thanks for posting.
I have some paper 2001 I-bonds that will mature in 2031, and they already have over $40k in gains today, so in 2031/32/33, their redemption could easily affect my medicare part B premiums and IRMAA adversely. I may choose to instead redeem them over 2 years, or even redeem some of them early to pay for kids college.
I figured forgoing the one month’s interest was well worth avoiding the taxation that would be attached if I cashed them in 2022.
The IRS takes the position that the interest is taxable in the year of final maturity, regardless of whether you delay cashing them in. See Q&A #16 here:
Savings bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity , or other taxable disposition, whichever occurs first. [emphasis added]
best,
dan
Darn!
I suppose I can still consider redeeming them to pay college costs. Of course I would have to ensure that MAGI is under ~$160k that year. Yet another reason to delay taking social security until at least after that point.
Or, at some point between now and then, I can choose to begin using the accrual method and pay taxes early on the phantom income.
Thanks to the wise advice of @aj485, I began the accrual method last year. This will avoid paying a very high tax in 2031, when the bonds mature. I will have to start taking MRDs from my IRA in 2025 so switching to accrual early avoids overlapping the bulk of payment of interest on the I-Bonds with my IRA MRDs.
Vary careful recordkeeping is needed because the IRS will receive a 1099-INT in 2013 showing the entire distribution of interest. I will have to prove that I have been paying taxes on the interest since 2021. I also have to leave clear instructions for my heirs (in case I die – I’m a cancer survivor) so they aren’t hit with the tax.
I thought I would delay the distribution of interest until after maturity, as @Goofyhoofy said, but fortunately @aj485 corrected me (as @TMFGalagan did now) or the taxation at maturity would have been catastrophic.
Wendy
Ah, that I didn’t know. Screwed again. Ah well, not the worst problem to have.
I may switch to accrual in 2025 if I can remain in the 24% tax bracket. Did you have to include all the income from 2001 through last year all at once? Or do you just accrue the current years interest each year starting in 2022 through 2031, and then include as income all of 2001 through 2021 plus 2031 interest in 2031?
Luckily the most recent tax law passed a few weeks ago changes my RMD start to age 75 so I have a long time before I need to worry about overlap. Your RMD may have changed to age 73 with this new law.
Yes. Since it was 20 years of interest all at once it was a big hit so I skipped my Traditional -to-Roth IRA conversion. Every year from now on I will include the interest from that year only. By the time the bonds mature I will only owe tax on one year’s interest.
Wendy
As @WendyBG said, you do need to include all of the already accrued interest for the year that you start using the accrual method. However, if you have bonds with different TINs (i.e. 2 different spouses, a trust, etc.), you can change to the accrual method for each TIN in different years to minimize the single year tax hit.
I would also point out that, under current law, in 2026, the 24% bracket will change back to the 28% bracket (along with all of the other brackets reverting to the prior rates) so this year through 2025 would probably be good years to change to the accrual method to claim savings bond interest, if you have bonds that mature later than 2025.
AJ
Isn’t there also a 25% bracket that comes back in 2026? I wonder where the breakpoint is/will be for that bracket? In any case, it’s looking like my best bet is to most heavily manage 2025 income as much as possible and attempt to take the I-bond income then.
This is yet another illustration of how unstable tax law makes medium-term planning more difficult. Very few other countries have this problem (though they often have different problems).
Does the IRS send a 1099 for the amount of interest earned or do you have to track that? Would only use the amount shown on the website or do you need to impute the amount not shown because of the three month window?
@JimA759s , the IRS does not send a 1099 for interest. I have maintained a spreadsheet since I bought the I-Bonds in 2001. One column for the original value and a different column for the current value taken from
https://www.treasurydirect.gov/BC/SBCPrice
Subtract the original value from the current value to obtain the interest to date. On a separate worksheet in the workbook I record the month-to-month value of the bonds. As @aj485 mentioned, I have I-Bonds with separate owners which need to be recorded and reported separately.
Record-keeping is essential to report the correct amount of interest for taxation…and also to prove that the tax was paid over the years before the bonds are redeemed.
Wendy
That site is really for paper I-Bonds - but I just login and can see the current value. However, the current value does not include the 3 months you lose if cashed in early. So I have no way to know what I actually earned for the missing months. Or I could just report what is showing as earned interest. Eventually the 3 months would show up and be reported. I just started with i-bonds in Nov2021; so I’m still learning the ropes. Thanks
That’s never relevant if you file your tax return after April 1st. And you can account for it on the last return you file that includes income from those bonds.
Yes, the current 22% bracket will revert to 25%. So, everything currently taxed at 22% and 24% will become taxed at a minimum of 25% beginning in 2026, under current law. Whether that law will remain the same until 2026 is the question. That said, given what’s currently going on in DC, it’s not clear that there will be any changes to current laws, even by 2026.
AJ
That was my question … does the 24% bracket turn into 25% or into 28%? (above you implied that 22 turns into 25 and 24 turns into 28)
It reverts to 28%, which is what I said in my initial answer:
What I was trying to point out was that even if you’re in the 22% bracket now, pushing some income into the 24% bracket now may save you taxes compared to 2026 and beyond, since that’s still lower than the 25% rate that the 22% bracket reverts to at that time.
As I also said, the rates will revert back to their previous rates. 10% and 35% rates didn’t change under the TCJA, but the rest of the brackets went down with that law, so they will go back up when the TCJA rates expire in 2026:
12% returns to 15%
22% returns to 25%
24% returns to 28%
32% returns to 33%
37% returns to 39.6%
AJ
AJ, thanks for the clarification! 