Defer I-bonds taxes and impact on taxation of SS benefits?

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jane1
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Joined: Mon Dec 26, 2011 1:00 am

Defer I-bonds taxes and impact on taxation of SS benefits?

Post by jane1 »

For those who max out on I-bonds every year and choose to defer Federal taxes until I-bond maturity, have you done analysis to see whether paying as you go might be more beneficial? I am thinking from the taxation of SS benefits perspective. If you expect to have income that makes 85% of your SS benefits taxable anyway, it may not matter. But I-bond maturity each year resulting in additional 1000s of $ on 1099-INT might push the AGI up by an amount significantly greater than 1099-INT as more SS benefits become taxable. Of course, taxation of SS might be very different in the coming decades.
Any thoughts or analysis on deferring vs pay every year?
Spirit Rider
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Re: Defer I-bonds taxes and impact on taxation of SS benefit

Post by Spirit Rider »

It is a valid consideration especially if your purchases are concentrated into a smaller number of years.

You could consider this like Roth conversions. Suppose you intend to claim SS benefits at 70 and stop working several years before. You can switch the tax status to yearly reporting which will have a significant first year. With proper planning (you don't do any Roth conversions that year and use low tax redemptions.

Then you have the best of both worlds. You defer the taxes during high wages years, then pay the taxes on lower income years. The first year bump is the major challenge, especially since you change the status on all bonds at the same time.
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jane1
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Re: Defer I-bonds taxes and impact on taxation of SS benefit

Post by jane1 »

Spirit Rider wrote:It is a valid consideration especially if your purchases are concentrated into a smaller number of years.

You could consider this like Roth conversions. Suppose you intend to claim SS benefits at 70 and stop working several years before. You can switch the tax status to yearly reporting which will have a significant first year. With proper planning (you don't do any Roth conversions that year and use low tax redemptions.

Then you have the best of both worlds. You defer the taxes during high wages years, then pay the taxes on lower income years. The first year bump is the major challenge, especially since you change the status on all bonds at the same time.
So can I report Interest in Year20 (for Years 1-20), then Year26 (for years 21-26) and finally Year30 (for years 27-30)? If so, that makes it much easier. I thought it was either every year or all in Year30.
Spirit Rider
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Re: Defer I-bonds taxes and impact on taxation of SS benefit

Post by Spirit Rider »

jane1 wrote:So can I report Interest in Year20 (for Years 1-20), then Year26 (for years 21-26) and finally Year30 (for years 27-30)? If so, that makes it much easier. I thought it was either every year or all in Year30.
While it is technically possible to switch back after you have switched, I don't know if that is what the IRS had in mind. The most common scenario would be to defer for twenty years and then switch and report years 1-20 in year twenty and report each year after that.
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kramer
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Re: Defer I-bonds taxes and impact on taxation of SS benefit

Post by kramer »

Spirit Rider wrote:
jane1 wrote:So can I report Interest in Year20 (for Years 1-20), then Year26 (for years 21-26) and finally Year30 (for years 27-30)? If so, that makes it much easier. I thought it was either every year or all in Year30.
While it is technically possible to switch back after you have switched, I don't know if that is what the IRS had in mind. The most common scenario would be to defer for twenty years and then switch and report years 1-20 in year twenty and report each year after that.
Yes. And, if I recall correctly, it is all or nothing for ALL the I-bonds you own. You can't do it with a subset of the I-bonds you own.
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jane1
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Re: Defer I-bonds taxes and impact on taxation of SS benefit

Post by jane1 »

kramer wrote: Yes. And, if I recall correctly, it is all or nothing for ALL the I-bonds you own. You can't do it with a subset of the I-bonds you own.
Thanks for your responses. Looks like it would be limiting unless you can keep changing between Methods 1 & 2 endlessly. Has anyone tried that? SS benefits taxation is something I would need to plan for. IRS Pub. 550 spells out the tax options for I-bonds.

From Pub. 550.
.... series I bonds in either of the following ways.
1. Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. (However, see Savings bonds traded , later.)
2. Method 2. Choose to report the increase in redemption value as interest each year.

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.
...
Change from method 1. If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change, you must report all interest accrued to date and not previously reported for all your bonds.
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....stuff deleted ...
Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. In that case, follow the form instructions for an automatic change.
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