Cashing in a savings bond -- Tax Concern?

Question

When I was young, my grandma would buy me (and my brothers) US Savings Bonds. I am now a grown man, and I am still holding on to them. Well, I have some home improvements coming up, and I could take out a home equity loan or line of credit to pay for them. But I've got these savings bonds sitting there just collecting dust. So I could cash them in and offset the amount of equity I'd have to use for these improvements. But here is my concern. I know that if you cash them in, you have to claim the interest earned on your federal taxes. So let's say I have a $2500 savings bond that is now worth $5000 (so it has earned $2500 in interest). If I would cash that in, how badly would I get hurt come tax time? Can anyone tell me approximately what percentage of that $2500 I would end up having to give back to Uncle Sam? I am just trying to avoid getting myself into trouble, where I'll end up owing $2000 next year. That would pretty much defeat the purpose of cashing them in.

Answer 1

The percentage you would pay would be based on your other income, it's hard to say without knowing your situation. On $2500 it would range from about 10% up to 35% depending on your income. Most people about 15%.
A way around this for the future, if your children get savings bonds, you can file a tax return for the child each year, declaring the amount of interest the bond earns that year. Unless your kid is quite wealthy they won't pay any tax yearly and when time comes to cash the bonds they will already have been declared and no tax is due.

Answer 2

Assuming that you didn't pay the tax on the interest as it accrued, all interest will be taxable in the year that you surrender the bonds. The interest is added to your other income. Taxes are based upon your total income, so without knowing your complete tax situation there's no way to say how much the tax will be. Somewhere between 0% and 39.6% is about the best that we can say right now. Edit: OK, if you just graduated in May or June and your total income for 2013 will be $14k you almost certainly are a dependent. That puts you in the 15% bracket already on the $14k. So any unearned income will be subject to the kiddie tax. Since you are already owe tax, the first $1,900 will be taxed at your marginal rate of 15%. Any unearned income above $1,900 will be taxed at the higher of your marginal rate or your parents' marginal rate. FWIW, with only $14k of income, buying a house is probably a non-starter right now.

Answer 3

I believe that under Section 1221 of the internal revenue code, savings bonds are not excluded from the definition of Long Term Capital Gains, so therefore would qualify for the Long Term Capital Gains rate (which for most taxpayers would be 15%) So, in cashing in your bonds, you would burn 15% of the gain to the government to have the cash on hand once again. So, for that $2500 worth of gain, you would have the $5000 now and would pay $375 (15% of the gain) at tax time.

One great use for US Savings bonds is to use them to pay for higher education, as that rolls them out tax free under section 135.

Answer 4

Yes, you'd pay income tax at a rate for whatever bracket you're in. But if you don't cash them, they do stop accumulating interest after a certain number of years, usually 30 - E bonds bought before mid-1976 are no longer earning interest.