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Bonds for kids- how are they taxed?
Old 08-25-2008, 04:22 PM   #1
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Bonds for kids- how are they taxed?

My parents want to buy my kids savings bonds (my twins are 5 months old).

Could someone shed some light on how these are taxed? They would probably be used for education.

I read something that anything under $900 in interest for kids is not taxed. So with a 3% yield, anything under $30,000 (per kid) would exempt us from taxes on the bonds?

Is interest paid along the way, or paid when redeemed (for example redeeming for education purposes at age of 18 )?

I am 35/ wife is 34. We are just barely in 15% tax bracket (AGI of ~100k, taxable income of 62k for 2007). I want to avoid interest bearing assets which might kick us into higher tax bracket.

529 plans for the kids are being considered, but then my parents would be "forced" to use the 529 options (equities) in the T Rowe Price 529 plan. That is not a bad thing, but might not be what my parents want to do.

Thx
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Old 08-25-2008, 05:56 PM   #2
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savings bond interest is paid when the bonds are cashed, though you can, if you wish, pay taxes on the interest as it accrues.
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Old 08-25-2008, 06:25 PM   #3
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savings bond interest is paid when the bonds are cashed, though you can, if you wish, pay taxes on the interest as it accrues.
Does this change (taxes owed) if bonds are held in kids name with me as custodian until they are 18?
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Old 08-26-2008, 01:17 AM   #4
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If they are used for education, the tax laws are favorable.......
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Old 08-26-2008, 08:22 AM   #5
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Originally Posted by jIMOh View Post
529 plans for the kids are being considered, but then my parents would be "forced" to use the 529 options (equities) in the T Rowe Price 529 plan. That is not a bad thing, but might not be what my parents want to do.
I suggest you revisit this option. You or your parents can invest in any state's 529 plan, not just the state you live in (you might not get an income tax deduction investing in another state tho) Check out www.SavingForCollege.com for the most comprehensive information I have found on the web.
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Old 08-26-2008, 08:59 AM   #6
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For the interest on the Savings Bonds to be tax free if used for education, there are some limitations as to how who has to own the bonds, and how much they can earn: see Education Planning.

For Savings Bonds and taxes, see Series I Savings Bonds Tax Considerations.

I agree with Bob, for saving for education, 529 plans are probably better than I bonds. If your parents don't want to take any risk with the money [hence the I bonds], a better option to save for the kids' college is a prepaid tuition 529 plan, or CollegeSure CDs. My in laws have been buying my kids I bonds for a couple of years. This year I'm going to suggest using the CollegeSure CD option.

- Alec
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Old 08-26-2008, 09:43 AM   #7
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If your AGI is too high, then savings bonds are NOT tax-free for education. And "too high" is relatively modest.
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Old 08-26-2008, 02:27 PM   #8
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If your AGI is too high, then savings bonds are NOT tax-free for education. And "too high" is relatively modest.
529 currently has the best tax treatment of any college option. Plus, grandparents and parents can get assets out of their estate by gifting to those plans.........
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Old 08-26-2008, 03:03 PM   #9
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529 comparisons aside... my understanding was also that the first $850 of income per child is not taxed...

https://www.smithbarney.com/products..._accounts.html
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Old 08-26-2008, 03:48 PM   #10
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I sent bonds and cash to each of the 9 grand kids for a few years. Got to be a hassle buying them, mailing them, etc. Told my kids to open banks accounts for the kids and deposit 50% there and let the kids spend the other 50%. Simpler - kids get older checks get bigger. If the parents want 529 etc., let them open them - they are responsible for funding their education (now that is another whole thread subject).
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Old 08-26-2008, 04:19 PM   #11
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I would caution you to avoid transferring assets from the grandparents to either the child's name or the parent's name (either in a 529 plan or savings bonds). Why? Because they will reduce the amount of financial aid that the child receives when it's time for college. Far better for the grandparents to hold the assets on behalf of the child so you don't have to disclose them on the FAFSA. If you absolutely must transfer assets, it would be better to setup a 529 rather than give savings bonds because the 529 will reduce your financial aid at the lower parents' rate rather than the child's rate (e.g. if the parents have $100,000, the financial aid system only assumes they should contribute 5% of that towards college expenses, whereas if a child has $100,000, they might assume the entire $100,000 is available for paying for college).

I would like to know who created a system where if the parents save an extra dollar for their child's 529 plan today, it reduces their financial aid by a dollar when they go off to college. Seems like a pretty clear incentive NOT to save anything.

Moreover, it doesn't sound like savings bonds would qualify for tax-free status in this instance even if they were used for educational expenses. The web site says that the bonds must be registered in the parents names with the child as a beneficiary, not an owner. If you wanted to register the bonds in the child's name, then they would have to be 24 years or older at the time of issue (which clearly they're not). Bizzare rules but that's the way they are.
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Old 08-26-2008, 04:44 PM   #12
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I would caution you to avoid transferring assets from the grandparents to either the child's name or the parent's name (either in a 529 plan or savings bonds). Why? Because they will reduce the amount of financial aid that the child receives when it's time for college. Far better for the grandparents to hold the assets on behalf of the child so you don't have to disclose them on the FAFSA. If you absolutely must transfer assets, it would be better to setup a 529 rather than give savings bonds because the 529 will reduce your financial aid at the lower parents' rate rather than the child's rate (e.g. if the parents have $100,000, the financial aid system only assumes they should contribute 5% of that towards college expenses, whereas if a child has $100,000, they might assume the entire $100,000 is available for paying for college).

I would like to know who created a system where if the parents save an extra dollar for their child's 529 plan today, it reduces their financial aid by a dollar when they go off to college. Seems like a pretty clear incentive NOT to save anything.

Moreover, it doesn't sound like savings bonds would qualify for tax-free status in this instance even if they were used for educational expenses. The web site says that the bonds must be registered in the parents names with the child as a beneficiary, not an owner. If you wanted to register the bonds in the child's name, then they would have to be 24 years or older at the time of issue (which clearly they're not). Bizzare rules but that's the way they are.
I appreciate the responses thus far. I have not checked the links out, but will soon, thank you.

I don't think planning for a financial aid application in 18 years is prudent. I am more concerned about my short and mid term tax planning (will the interest on the savings bonds if held in my name affect my tax return is a bigger concern than financial aid in 18 years).

My logic with this is I am in 15% bracket now, and have Roths fully funded while in 15% tax bracket. I know for certain I will be losing the deductions which put me in 15% bracket and the 28% bracket will be looming around the corner. Meaning I might have a year or two in 25%, but see 28% bracket coming quickly.

Issue here is that mortgage interest kicks us into 15% bracket, but as the 30 year note is paid down, it will move us out of 15%. Our gross income is closer to 28% bracket than the 15%... so tax planning now trumps financial aid concerns later.

I am looking into the 529's at TRP. More than likely my parents contributions will be the only contributions for some time.

In addition leaving $$ in parents names has some issues. Dad is 70 yo and in weakening health. His father died in his 70's (mother made it to 93 though). My mother is 65 and her health is not giving me confidence she would make it to 83.

And my parents have promised me money before (for moving once, for moving second time, for wedding) and not pulled through. So a bird in hand is worth 10 in the bush in this case- get the money transferred to either my name or my twins names is my line of thought.

2 years ago my parents weren't even speaking to me... so again there is a window here and I know I want to accept the money for my kids, just not sure about the taxes.
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