For reasons not necessary to go into, we did not get around to Roth conversions in 2022 that we had payed estimated taxes on. As such, we have way over payed on taxes and have a very low tax rate this return.
We also have a significant amount of interest on Ibonds that we have not payed taxes on. Can we still switch from a tax accrual until maturity to prepaying the taxes on our 2022 return, or would that have had to be initiated in 2022?
I do realize this would mean we would be prepaying from here on out, annually, until maturity, at which point we would receive the proceeds of the bonds without further tax payments.
@inparadise yes, you can switch to pre-paying the taxes.
I began doing this in 2021 when @aj485 advised me that my 2001 I-Bonds would pay interest all at once in 2031 when they mature, producing a very large lump sum which would be subject to high tax.
Unlike most bonds, I-Bond interest is not reported on a 1099-INT annually. I created a spreadsheet listing each I-Bond by serial number. I then found their total interest here by entering 12/2021:
For paper bonds: Calculate the Value of Your Paper Savings Bond(s)
For electronic bonds: Log In — TreasuryDirect
I reported the interest in the box on the tax prep software that says “Savings Bond Interest.” I attached my printed spreadsheet to my tax return. I put a copy of the spreadsheet in the envelope with the paper savings bonds in my safe deposit box. (In case I die my executor will find it.)
As you mentioned, an I-Bond whose interest is switched from tax accrual until maturity to prepaying the taxes must continue through the life of the bond. I am paying interest on these bonds in 2022.
I intend to print out and send to the IRS the entire history of tax payments every year. (2021, 2022, etc.)
When the I-Bonds mature in 2031, Treasury will generate a 1099-INT reporting the entire interest payment. The IRS computer in 2031 will almost certainly not be aware that taxes have already been paid on these bonds. I intend to send a letter with my Form 1040 (and Form 1041 since some of these bonds are owned by a trust) plus the entire spreadsheet showing 10 years of tax payments on each specific individual bond by serial number. I think it will require human intervention to straighten this out.
I plan to write about this in my “Estate Book” because the worst thing would be for me to die and my executor not know how much of the tax has already been paid.
Great ideas, thank you. My concern was that we were changing our approach only in 2023 with the tax return for 2022, but I guess reality is that the interest was earned in 2022 and before, so that’s appropriate.
We file jointly, and will be getting quite the tax refund. Are Ibonds in lieu of refund limited to $5,000/return, or per SS No?
Per return. You will need to fill out Form 8888 Form 8888 (Rev. November 2022) (irs.gov) to allocate some of your refund to I-bonds. From the Form 8888 instructions
You may request up to three different savings bond registrations. However, each registration must be a multiple of $50, and the total of lines 4, 5a, and 6a can’t be more than $5,000 (or your refund amount, whichever is smaller).
Even if they “know”, when they send the pile of 1099s to the accountant, the accountant is VERY likely to use the numbers on the 1099 and not investigate further. Unless the executor is really a pedantic type, you have a very high likelihood of paying taxes twice on that interest.
Reminds me of something from 40+ years ago! In the late 70s, when I started filing tax returns of my own, my dad began to share his tax return with me each year. I had built up a rudimentary tax program to do mine, and later moved it to a spreadsheet (in a visicalc knockoff). Anyway, I ran his numbers, and while doing so, I noticed some grave errors that were costing him a few hundred bucks. He brought it to the attention of his accountant (a long-time family friend) and at first he balked, but was very quickly convinced when shown the actual numbers. My dad stopped using an accountant the following year and we did it ourselves thereafter.
I would also point out that if you plan on doing Roth conversions in 2023, you could just let some/all of the excess money roll over for your 2023 taxes. If you let the IRS keep enough to meet your safe harbor amount (generally either 100% or 110% of your 2022 tax liability, depending on income), you won’t have to make any estimated tax payments for 2023, and would just be able settle up for what you owe for 2023 on April 15, 2024.
LOL. When I saw Mark’s post my first thought was how DH resembled that remark. Super @nal about details. Engineer. You should see him dealing with insurance people. Fights every single 5 cent overcharge. I am surprised they don’t pay him to go away.
I would point out that if you are making estimated tax payments to meet the safe harbor, you will end up letting the IRS hold an average of 61% of that amount from 4/18/23 to 4/15/24 anyway. So is a (taxable) 4% on 39% of the safe harbor amount really going to net you that much?
You guys should really talk more. Even a trophy wife should be able to tell a CPA the taxes were already paid on the bonds, or your written instructions like Wendy provides, (AMAZING idea, btw Wendy,) should do the trick. I also suspect it would be much easier on bonds held electronically in Treasury Direct, and if you don’t already have Ibonds, you can simply select the option to pay taxes on the computed interest annually rather than at expiration or termination. IIRC, they will then send you a 1099 each year.
One concern I do have about my paper bonds, which I put into Treasury Direct’'s program to track the interest, by purchase date, dollar amount of purchase and serial number, is the accuracy of the information it generates. Is it really possible that some of my Ibonds are now earning over 13% at this time? Not complaining, mind you, unless I pay taxes on that info and it is wrong. The bonds calculator, (https://www.treasurydirect.gov/BC/SBCPrice,) shows my bonds bought in 2000-1 earning between 9.99-13.39%. They have certainly showed lower in the past, but I recall mentioning how well they were doing once before and AJ commenting that was not possible, so definitely want to double check the accuracy of the tool I am using before relying on it to pay taxes on something not yet received.
Yeah, somewhat complicated, but less so if held electronically, so I wouldn’t let that stop you. Who knows how long inflation will stick for.
Here’s a chart of all I-bonds and their rates at all times. Indeed there was one period (6 months) in which a certain vintage I-bond (a 3.6% fixed rate one purchased from 5/2000 to 10/2000) earned 13.39%.
Awesome. Thanks Mark. Guess this would have been a good place to indicate why I bought I bonds at that time. It was originally our “emergency fund” which would then have been used to pay for the kids’ education in a tax free way, though by the time the kids were old enough for college, we were making too much money to qualify and happily held on to them. In those days, you were also able to buy with credit card and collect the cash back from the card. Was a screaming value, since we pay off our card balances monthly. These days, we just buy the $20K/year as an inflation hedge, figuring we can always cash them in after a year if there is a better investment.
