tax on US savings bonds' interest

[fusili3]

Jurisdiction

California

I was given 5 us savings bonds 30 years ago. I cashed them on the 1st of Sept, as they had matured.

The taxable interest was $78680. I had 0 income in 2020 and 2021 and 0 income, besides these bonds, in 2022.

LINE 37 OF THE 1040, THE tax that I will OWE (I AM SINGLE WITH 0 Dependents and am under 65 years of age), based on the 2021 tax table, is $10296. I have a couple of questions.

1. The 2021 tax book says, 'You may owe estimated tax penalty if Line 37 is at least $1000 and is more than 10% of the tax shown on my return." BOTH of those are true, but

2. the book also says that AN exception is made and I will NOT OWE the tax if my 2021 tax return was for 12 full months (IT WAS) and I had NO tax shown on LINE 37 (I did not have any tax or any income that year).

I am hoping that I just owe the $10296 and no penalty. Am I correct?

3. in 2023 I also will cash 5 bonds for the same amount with NO OTHER INCOME.

WILL the IRS charge me an estmated tax penalty then?

4. WILL I have to pay estimated tax quarterly?

5. Should I mail the irs an estmated payment now, of say, $10,000, to avoid any future problems?

--now, for my california tax return, I have a different situation because US savings bonds are not taxable.

6. DO I have to file a california tax return to show that I had $78680 in income, but then I subtracted all $78680 for a net income of 0? My point is that, if my income is 0 after the subtraction of the bond, do I need to spend the time filling out the form and sending it in? I do not want the state to accuse me of failing to file, but if I owe 0, then what is the purpose of filing, creating paperwork, and making the state read a return that has no owed tax and no refund?


thanks

 

[army judge]

Tax advice should be sought ONLY from a CPA or tax attorney that you've retained to assist you in properly filing your taxes.

There is very little anyone who isn't YOUR tax attorney or CPA can do to assist you with filing your taxes correctly.

 

[adjusterjack]

1. The 2021 tax book says, 'You may owe estimated tax penalty if Line 37 is at least $1000 and is more than 10% of the tax shown on my return." BOTH of those are true, but

2. the book also says that AN exception is made and I will NOT OWE the tax if my 2021 tax return was for 12 full months (IT WAS) and I had NO tax shown on LINE 37 (I did not have any tax or any income that year).

If you want to avoid the doubts and sleepless nights, read the estimated tax instructions and file your quarterly estimated tax by September 15.

2022 Form 1040-ES (irs.gov)

You'll have to pay it sooner or later, might as well pay it now.

3. in 2023 I also will cash 5 bonds for the same amount with NO OTHER INCOME.

Now that you are becoming an expert on estimated tax, you'll be able to time it better next year.

4. WILL I have to pay estimated tax quarterly?

5. Should I mail the irs an estmated payment now, of say, $10,000, to avoid any future problems?

Will and should are two different things. My suggestion is pay it now and get it over with.

--now, for my california tax return, I have a different situation because US savings bonds are not taxable.

6. DO I have to file a california tax return to show that I had $78680 in income, but then I subtracted all $78680 for a net income of 0?

I think you can probably find the answer at:

Income Tax (ca.gov)

 

[Tax Counsel]

I am hoping that I just owe the $10296 and no penalty. Am I correct?

Yes. Since your tax before any payments/credits last year was zero, you did not have to make estimated tax payments for 2022. Note that you can still make an estimated payment for 2022 for that income by January 15 and not owe any penalty since the income was taken in September. So you wouldn't have a problem here even if you had to make an estimated payment as long as you did it by January 15. Note too that the penalty amount is just computed as an interest charge on the estimated payment.

3. in 2023 I also will cash 5 bonds for the same amount with NO OTHER INCOME.

WILL the IRS charge me an estmated tax penalty then?

Yes, if you fail to make estimated payments in 2023.

4. WILL I have to pay estimated tax quarterly?

That depends on the timing of your income. You have the option to annualize the income to determine the estimated payments, so if you take the income in say October you'd only need to make the one estimated payment in January, 2024. You'd also have to complete an extra form, Form 2210, for that. That form is notorious for being difficult for many taxpayers.

5. Should I mail the irs an estmated payment now, of say, $10,000, to avoid any future problems?

Just based on what you said here, you wouldn't need to do that. But you can estimate what you will owe and pay that by January 15 for extra peace of mind if you wish.

--now, for my california tax return, I have a different situation because US savings bonds are not taxable.

From what you have said here you have no California adjusted gross income (AGI) and therefore would not be required to file a state return. But if you don't file you may get a letter from the state about the interest income from the federal return and why no state return was filed. If you get that, you'd respond it was all US Savings Bond interest and not taxable income in CA.

If you left out any information or if any information is incorrect, that could change the answers here. For more details on the federal estimated tax rules see IRS Publication 505.

 

[fusili3]

thanks to all of you. I will pay the estimated tax NEXT year and avoid future problems and worries.

 

[fusili3]

IF I understood you correctly, then
WHEN I cash the next round of US bonds in FEB of 2023,
I will have 3 months to pay the estimated tax, which probably would be very close to what it is this year, $10,296.

1. If I write a check to the IRS for $10,296 in February for the 2023 tax, do I just send it to the IRS with no form OR do I write a letter that says 'for 2023 taxes in advance'?

2. THE FORM 2210 that you mentioned is only if I owe a penalty, right?

Thanks again.

 

[Tax Counsel]

IF I understood you correctly, then
WHEN I cash the next round of US bonds in FEB of 2023,
I will have 3 months to pay the estimated tax, which probably would be very close to what it is this year, $10,296.

The first "quarter" estimated tax deadline is April 15. I put the quarter in quotes because the payment schedule is not evenly divided into three month chunks.

I1. If I write a check to the IRS for $10,296 in February for the 2023 tax, do I just send it to the IRS with no form OR do I write a letter that says 'for 2023 taxes in advance'?"

You use Form 1040 ES. It has instructions on the estimated tax rules and information to help you correctly compute your estimated tax payment, along with the payment vouchers you send in with the check. On the check itself put on the memo line your SSN and "2023 Form 1040 ES".

2. THE FORM 2210 that you mentioned is only if I owe a penalty, right?

Or to avoid/reduce a penalty if you need to annualize your income, i.e. your income is not earned evenly throughout the year. The IRS assumes that the income is evenly earned throughout the year unless otherwise informed. That means it generally looks for each of the 4 payments to be about the same amount. If your income varies throughout the year with differing amounts of each payment, you need to be able to tell the IRS how the income was earned during the year to match it up. This is most important when the bulk of the income comes later in year, as annualizing it in that case will help you avoid a penalty.

 

[fusili3]

Great day in HEAVEN! Thanks for such thorough answers. Take care of yourself. I am truly grateful. YOu covered every aspect of my situation for this year and next. WOW! I really am fortunate to have gotten your answers..

 

[army judge]

I cashed some Series E, Series EE, and Series I savings bonds. How do I report the interest?

Answer:
In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.

If your total taxable interest for the year is more than $1500, you must complete Schedule B (Form 1040), Interest and Ordinary Dividends and attach it to your Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors.
If your total interest isn't more than $1500 for the year, and you're not otherwise required to report interest income on Schedule B, report the savings bond interest with your other interest on the "Interest" line of your tax return. For more information, see the Instructions for Schedule B (Form 1040).
Exception: Some or all of the interest may be excludable from your gross income if you pay qualified higher education expenses for yourself, your spouse, or your dependent during the year.

Savings Bonds | Internal Revenue Service
...


US Savings Bonds and Taxes - The Wealthy Accountant
...


Individual - Tax Considerations for I Bonds
...

 

[SewardsSteward]

As someone who is just getting into tax law, this poster says that their taxable interest was 76860. Is there non-taxable interest here? Could there be interest that was excluded for any reason? Is there a different between "non-taxable" interest and "excluded from tax" interest, at least in this case?

I was recently told that there are not many items that are excluded from what I'm assuming would be income tax here, that is specifically laid out by law and that everything down to a dollar and/or a penny gets taxed and, obviously, this is all depending on jurisdiction, but let's just use this example.

 

[adjusterjack]

As someone who is just getting into tax law, the first thing you MUST learn is how to look up stuff on the IRS website.

Site Index Search | Internal Revenue Service (irs.gov)

Scroll down to Schedule B and its instructions.

 

[Tax Counsel]

As someone who is just getting into tax law, this poster says that their taxable interest was 76860. Is there non-taxable interest here?

In order to answer that I would need to know what kind of investment is paying the interest. Any income that is nontaxble/excluded from gross income won't eveh show up on the return and would not be an issue. When it comes to interest, the most common nontaxable interest comes from government obligations. Interest paid by the federal government on U.S. Treasury bonds, notes, and bills are taxable income on the federal return but not on the state return, while interest paid by state/municipalities is exempt from federal tax but often taxed by the state.

 

[SewardsSteward]

So, say that the interest were being paid by a co-pay, as they would not be a governmental body, then the interest would be taxable, right?

 

[adjusterjack]

So, say that the interest were being paid by a co-pay, as they would not be a governmental body, then the interest would be taxable, right?

A "co-pay"?

 

[Tax Counsel]

So, say that the interest were being paid by a co-pay, as they would not be a governmental body, then the interest would be taxable, right?

Exactly what kind of investment is it and what kind of company is paying it? It's very likely that the interest is indeed taxable but I don't have a clear idea of what this investment is.

 

[welkin]

It's very likely that the interest is indeed taxable but I don't have a clear idea of what this investment is.

Perhaps US Treasury bond funds where the interest is paid through the fund management company?

 

[Tax Counsel]

Perhaps US Treasury bond funds where the interest is paid through the fund management company?

That's one possibility, though in that case I would expect the fund management firm to issue a 1099-INT for it.