Tres.Direct default I-Bonds setting to defer tax reporting?

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Tres.Direct default I-Bonds setting to defer tax reporting?

Postby papito23 » Fri Feb 17, 2012 10:09 pm

When you buy an I-Bond, will it automatically defer interest reporting, or is the default that it will report annually? I understand that it can be either/or. Couldn't find anything in the Wiki or on TreasuryDirect.gov

I found the TreasuryDirect.gov site really easy to get set-up with. But I did an I-Bond purchase before I could blink! I put in 3 pieces of data (type, amount, and I agree to terms) under the Purchase Express box and clicked "Buy Now." There was no "are you sure?" or "please confirm purchase." Still did what I wanted to do, but not super-pleased with the website thus far.

I want inflation protection in the short-medium term (emergency fund) but I also want to reduce investment income as much as possible in 2012. If I exceed $3,200 for 2012, I completely lose my Earned Income Taxed Credit (which would be a $3,169 mistake). I already have some capital gains from moving from taxable to IRA accounts, and in December the always unpredictable CG/dividends from my actively managed fund (usually ~2-4% of share price, but was 11% in 2006 - T Rowe Price Capital Appreciation). I'm in a unique situation of having decent assets and no debt at a young age, but income poor, back in school, and a father. Not actually a bad set-up though. :beer
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Fri Feb 17, 2012 10:12 pm

You report your own interest on your tax return. No one fills out your return for you. You have a choice; many choose to defer.

If you are asking if treasurydirect will send you a 1099 every year, the answer is no.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby papito23 » Fri Feb 17, 2012 10:23 pm

Thanks. I have never held Treasury assets online, so I figured it was a 1099 like any other interest-bearing investment. Good to know.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Fri Feb 17, 2012 10:33 pm

The info is on the same page that discusses your reporting options. You get a 1099 at maturity. [correction: you don't get one; you have the opportunity to print your own.]
In TreasuryDirect, when taxable transactions occur, such as savings bonds that mature or are redeemed, a 1099-INT is generated for you within the application, and you can print a copy for your records.

Methods of Reporting Interest
You have the choice of reporting interest earned on savings bonds in several ways. ...
http://www.treasurydirect.gov/indiv/res ... nsider.htm
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby Mel Lindauer » Fri Feb 17, 2012 10:48 pm

athada wrote:When you buy an I-Bond, will it automatically defer interest reporting, or is the default that it will report annually? I understand that it can be either/or. Couldn't find anything in the Wiki or on TreasuryDirect.gov



Tax-deferred is the default.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Fri Feb 17, 2012 10:58 pm

I hate to disagree with Mel about I bonds, so let's say I disagree with Mel about the meaning of the word "default." Default implies there are two options, the default and the other option. If the default is that TD does not send you a 1099, then there must be a way to get them to send you a 1099 every year if that is what you wish. But you can't, and they won't. There is no default as opposed to another option; there just is, and what there is is no 1099 until redemption or maturity.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby Mel Lindauer » Fri Feb 17, 2012 11:21 pm

My comment was referring to the option of tax-deferral on one's income tax as opposed to reporting the I Bond interest income on an annual basis.

In that regard, the default is tax-deferral, but you can choose to report interest annually if you prefer. However, as ss correctly pointed out, you don't have the option of getting a 1099 annually; you'll be responsible for figuring out the annual interest and reporting it
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby Langkawi » Fri Feb 17, 2012 11:38 pm

athada wrote:But I did an I-Bond purchase before I could blink! I put in 3 pieces of data (type, amount, and I agree to terms) under the Purchase Express box and clicked "Buy Now." There was no "are you sure?" or "please confirm purchase." Still did what I wanted to do, but not super-pleased with the website thus far.

Sorry, but blaming a website because you don't know the definition of "Express" is bogus. There are alternative methods of purchase on TreasuryDirect if you want to do it slowly.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby papito23 » Sat Feb 18, 2012 10:51 am

Langkawi wrote:
athada wrote:But I did an I-Bond purchase before I could blink! I put in 3 pieces of data (type, amount, and I agree to terms) under the Purchase Express box and clicked "Buy Now." There was no "are you sure?" or "please confirm purchase." Still did what I wanted to do, but not super-pleased with the website thus far.

Sorry, but blaming a website because you don't know the definition of "Express" is bogus. There are alternative methods of purchase on TreasuryDirect if you want to do it slowly.


You're right. It's an okay website. But a good website is idiot-proof, as myself and many others are mistake-prone. (And I would guess the average client on TreasuryDirect would be older and less computer literate than the average internet user). Having a one-click purchase with no confirmation that you typed in the right number of 0's be the most prominent feature upon the first log-in is not good design.

The Vanguard brokerage is a good example of having both fast purchase (3-clicks) and guided-purchase option, and keeping them both simple and clear.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby 555 » Sun Mar 18, 2012 2:36 am

I have exactly the same question as the OP, and I'm not sure it was answered. The aim is to keep investment income below a certain level (e.g. $3,150 in 2011, inflation indexed) so that you are not disqualified from Earned Income Taxed Credit which is worth thousands.

See 1040 instructions for Lines 64a and 64b—Earned Income Credit (EIC) ...Step 2 Investment Income.

It seems Investment Income =
Line 8a+Line 8b+Line 9a +Line 13*
*If line 13 is a loss, enter -0-.

So does deferred I-bond interest occur anywhere here in these form 1040 lines?
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Sun Mar 18, 2012 8:38 am

You can either defer reporting (so nothing goes on your return unless there is a redemption or maturity) or you can report annually, in which case it would go on your return. However, if you report annually, you must report all your interest from all your bonds.
You must use the same method for all series EE, series E, and series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.
http://www.irs.gov/pub/irs-pdf/p550.pdf

Interest goes on Schedule B line 1. The total goes on Schedule B line 4. That amount goes to 1040 line 8a. So yes, reported interest ends up on 8a. [Schedule B line 3, excludible interest from form 8815 is "For Filers With Qualified Higher Education Expenses.") But if you defer, there is no interest reported on Schedule B, so it goes nowhere, certainly not to line 8a.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby dickenjb » Sun Mar 18, 2012 9:02 am

Langkawi wrote:
athada wrote:But I did an I-Bond purchase before I could blink! I put in 3 pieces of data (type, amount, and I agree to terms) under the Purchase Express box and clicked "Buy Now." There was no "are you sure?" or "please confirm purchase." Still did what I wanted to do, but not super-pleased with the website thus far.

Sorry, but blaming a website because you don't know the definition of "Express" is bogus. There are alternative methods of purchase on TreasuryDirect if you want to do it slowly.


+1. Maybe he expects Amazon's "one click ordering" to ask if he is sure as well.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby Cosmo » Sun Mar 18, 2012 10:29 am

Mel Lindauer wrote:
athada wrote:When you buy an I-Bond, will it automatically defer interest reporting, or is the default that it will report annually? I understand that it can be either/or. Couldn't find anything in the Wiki or on TreasuryDirect.gov



Tax-deferred is the default.


Thanks, Mel, very succinct answer in just five words.

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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby 555 » Sun Mar 18, 2012 10:49 am

sscritic wrote:You can either defer reporting (so nothing goes on your return unless there is a redemption or maturity) or you can report annually, in which case it would go on your return. However, if you report annually, you must report all your interest from all your bonds.
You must use the same method for all series EE, series E, and series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.
http://www.irs.gov/pub/irs-pdf/p550.pdf

Interest goes on Schedule B line 1. The total goes on Schedule B line 4. That amount goes to 1040 line 8a. So yes, reported interest ends up on 8a. [Schedule B line 3, excludible interest from form 8815 is "For Filers With Qualified Higher Education Expenses.") But if you defer, there is no interest reported on Schedule B, so it goes nowhere, certainly not to line 8a.

Thanks for confirming this. So it seems I-bond interest works as the OP and I want for the purposes of Earned Income Taxed Credit. These I-bonds (with Method 1) work like self-contained non-deductible IRAs, and you can manage which year interest is reportable by redeeming them in that year, making them a useful tax planning tool (although you may be forced to redeem them, due to need of cash, which could mess up the plan).

Also, to the OP, to maximize Earned Income Taxed Credit make sure you make (form 1040) your AGI equal to your Line 7, e.g. by putting just the right amount into Trad IRA (and the rest into Roth IRA).
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby NAVigator » Sun Mar 18, 2012 11:13 am

Be aware that you can switch from deferring paying taxes to paying annually, but not the other way around.

In other words, you have the choice whether you want to defer the federal income tax due on the investment earnings until the bonds are redeemed or mature, or to declare the interest earnings each year. You can decide to change from the tax-deferred approach to annual reporting, but you can only change once. After the change, you have to keep reporting the interest income for all the savings bonds that you own on an annual basis.

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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Sun Mar 18, 2012 11:23 am

Jerry:

You are not stuck with annual if you choose it. See pub 550 for switching:
Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next.

Change from method 2. To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.
http://www.irs.gov/publications/p550/ch ... nk10009907

2 is annual; 1 is deferred.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby Mel Lindauer » Sun Mar 18, 2012 11:31 am

sscritic wrote:Jerry:

You are not stuck with annual if you choose it. See pub 550 for switching:
Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next.

Change from method 2. To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.
http://www.irs.gov/publications/p550/ch ... nk10009907

2 is annual; 1 is deferred.


sscritic beat me to it, Jerry. I'll just add that you can also use IRS Form 3115 to gain automatic approval to switch from annual reporting to deferred reporting.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby NAVigator » Sun Mar 18, 2012 11:39 am

Mel and sscritic, thanks so much for this information about switching between annual and deferred taxes. That is what is so great about discussions on this forum; learning the things you thought you knew but didn't know and the things you didn't know that you didn't know. But you already know that. :wink:

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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Sun Mar 18, 2012 11:47 am

NAVigator wrote:Mel and sscritic, thanks so much for this information about switching between annual and deferred taxes. That is what is so great about discussions on this forum; learning the things you thought you knew but didn't know and the things you didn't know that you didn't know. But you already know that. :wink:

Channeling a certain Secretary of Defense this morning are we?
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby papito23 » Mon Mar 19, 2012 10:50 pm

555 wrote: Also, to the OP, to maximize Earned Income Taxed Credit make sure you make (form 1040) your AGI equal to your Line 7, e.g. by putting just the right amount into Trad IRA (and the rest into Roth IRA).


Good tip! So many tricks, so little time.

If I understand it right, this trick is only necessary if you are in the "phase-out" region of the credit. See [1] and [2].

For my particular situation (married filing jointly, one child), I'll probably be sitting in the plateau again. The 2011 EIC was worth $17 for every $50 of income (like a 34% bonus!) up to $9,100, then plateaus at a value of $3,094 until $21,800 in income (see the mention of that special "$21,800" at [1]). Then you lose the credit at $17-per-additional-$50 until it's gone at $41,132. (EDIT: I think you lose slower than that... more like $8 for $50. See this newer discussion).

And of course, this is so nice for low-income folks in that it's refundable. Worthless otherwise, as I didn't owe any taxes.

Trad. IRA or 401(k) should work the same, yes? Just as long as you can bring down 38 closer/equal to line 7.

I will take note of this for when I get a real job again. Based on my career / out lifestyle, I'm guessing we'll be in the phase-out region for some time to come. Nice little trick for a 34% (EDIT: 16%) instant ROI (+ additional 3-4% from my state EIC)... awesome!

[1] p. 49 of i1040
[2] EIC Table on pub. 596
Last edited by papito23 on Fri Dec 20, 2013 3:41 pm, edited 4 times in total.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby papito23 » Mon Mar 19, 2012 11:03 pm

555 wrote:Also, to the OP, to maximize Earned Income Taxed Credit make sure you make (form 1040) your AGI equal to your Line 7, e.g. by putting just the right amount into Trad IRA (and the rest into Roth IRA).


If the Wiki had a section for EITC, this trick should be one there!
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby 555 » Tue Mar 20, 2012 10:46 am

The crucial part is Worksheet A for EIC. Part 2 says "Look at the amounts on lines 5 and 2.
Then, enter the smaller amount on line 6." That's where lines 7 and 38 come in, but it actually compares the Earned Income Credit (EIC) Table values arising from Lines 7 and 38 so if you are in the "plateau" then my suggestion is redundant. It is useful for the "phase-out region".

By the way also see this
http://www.taxpolicycenter.org/briefing ... seouts.cfm
for useful info an various phaseouts.

Actually there is an important difference between 401k and IRA for this. I have a "cafeteria plan" (aka "Section 125" google them) at work and so my 401k-type plans, actually 401a, 403b, 457b plans (as well as health ins, FSA) are subtracted from my gross salary before getting the number on Line 7. Thats how I get low enough to get EIC to start with. By contrast Trad IRA (Line 32) is between Lines 7 and 38.

If you have, say, $2k in investment income (Lines 8,9,13) (and see step 2 of EIC instructions, which is part of what your OP is about), then you can put $2k in Trad IRA (Line 32) to cancel the investment income (and put the rest in Roth). This is for when you are in the "phase-out region".

You still need to figure out what works for your situation. It's also good to have some cheap/free tax software (I use TaxACT) to experiment with numbers (but you the have to understand what calculation caused those numbers).
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby crowd79 » Thu Dec 20, 2012 12:49 am

Do you think it is beneficial that I report my I-Bond interest for tax year 2012? Either way, It appears that due to all of my deductions and various other credits that I will be able to qualify for, I will get all my Federal taxes back for 2012, whether I claim Bond interest or keep it deferred.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby papito23 » Thu Dec 20, 2012 9:42 am

crowd79 wrote:Do you think it is beneficial that I report my I-Bond interest for tax year 2012? Either way, It appears that due to all of my deductions and various other credits that I will be able to qualify for, I will get all my Federal taxes back for 2012, whether I claim Bond interest or keep it deferred.


Depends largely on your personal situation. I, for example, needed to shield some investment return from taxation this year so I wouldn't exceed $3,200 and lose the Earned Income Tax Credit. I will, however, declare the interest in 2013 and pay 0% tax while I can (poor grad student father) instead of paying interest years later when I'm (Lord willing) in a higher tax bracketany tax bracket at all.

All things equal (which they usually aren't) I'd defer.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby STC » Thu Dec 20, 2012 9:47 am

Reporting tax­exempt interest. Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, in- cluding tax-exempt interest on zero coupon mu- nicipal bonds) and exempt-interest dividends from a mutual fund as shown on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Add these amounts to any other tax-exempt in- terest you received. Report the total on line 8b of Form 1040A or Form 1040. If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. Do not add tax-ex- empt interest in the total on Form 1040EZ, line 2.
Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Do not add the amounts in Form 1099-INT, box 9 and Form 1099-DIV, box 11 to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10.
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Re: Tres.Direct default I-Bonds setting to defer tax reporti

Postby sscritic » Thu Dec 20, 2012 9:51 am

This thread is about I bonds. I bonds are not exempt from federal tax.
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