| Investments / Interest on Series E bonds that reach "final maturity" may be taxable |  |
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One of the principal reasons for
buying U.S. savings bonds is the fact that interest can build up without
the need to currently report or pay tax on it. The accrued interest is
added to the redemption value of the bond and is paid when the bond is
eventually cashed in. Unfortunately, the law doesn't allow for this
tax-free build up to continue indefinitely. For example, Series E bonds
issued in January, 1971 reached final maturity after 30 years, in
January, 2001. That means that not only have they stopped earning
interest, but all of the accrued and as yet untaxed interest is
potentially taxable in 2001. A $1,000 E bond bought in January, 1971 for
$750 is now worth about $5,052 (and won't increase any more in value).
The entire difference (i.e., $4,302) is potentially taxable in 2001. But there's a way to avoid having to
pay tax now on all of the accumulated interest. This involves a special
rule that permits further deferral if the E bond is exchanged for a
Series HH bond. However, this exchange must be made within a prescribed
time period. Many people own Series E bonds that were bought many years ago and which, except on occasional trips to the safe deposit vault, are rarely looked at or thought about. If you own bonds that are reaching final maturity this year, action is needed to assure that there's no loss of interest or unanticipated current tax consequences. Check the issue dates on your bonds. |
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