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Taxes paid on Tips
Old 02-10-2006, 03:39 PM   #1
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Taxes paid on Tips

Am I correct in this assumption. You pay yearly taxes on Tips based on the changing CPI portion of the rate, but receive only the fixed portion of the rate twice a year.

Example:

CPI 5.75% (Pay taxes on 5.75% not received = but credited)
Fixed rate 1.75% (Receive interest twice a year)

Do you pay taxes on that 1.75% interest that you do recive yearly, or only when you sell?
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Re: Taxes paid on Tips
Old 02-10-2006, 04:57 PM   #2
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Re: Taxes paid on Tips

Quote:
Originally Posted by modhatter
Am I correct in this assumption. You pay yearly taxes on Tips based on the changing CPI portion of the rate, but receive only the fixed portion of the rate twice a year.

Example:

CPI 5.75% (Pay taxes on 5.75% not received = but credited)
Fixed rate 1.75% (Receive interest twice a year)

Do you pay taxes on that 1.75% interest that you do recive yearly, or only when you sell?
Yes, you pay taxes on what they give you in cash and also the CPI adjusted amount.

I receive a 1099-OID and a 1099-INT from the Treasury each year.
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Re: Taxes paid on Tips
Old 02-10-2006, 05:59 PM   #3
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Re: Taxes paid on Tips

This is off topic - I was interested to know your thoughts on the difference between Bonds and Treasury notes with respect to the value of the investment potential and the safety in perserving the principal together with the interest. I'm new to Bonds or TIPs etc having kept to real estate, equities, CDs and MMs.
Am I right that the Bonds payout depends upon the market rates fluctuating over a given year - that you are not locked into a specific rate. How risky are they?
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Re: Taxes paid on Tips
Old 02-10-2006, 09:04 PM   #4
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Re: Taxes paid on Tips

Quote:
Originally Posted by Rosalita
This is off topic - I was interested to know your thoughts on the difference between Bonds and Treasury notes with respect to the value of the investment potential and the safety in perserving the principal together with the interest.* *I'm new to Bonds or TIPs etc having kept to real estate, equities, CDs and MMs.*
Am I right that the Bonds payout depends upon the market rates fluctuating over a given year - that you are not locked into a specific rate.* How risky are they?
Rosalita,
I really feel that I can help answer your question, only I honestly don't know what you are asking.

If you are suggesting that bond prices and yields move based on changes in interest rates, then yes, you are correct. If you are saying that because of these fluctuations you are not "locking in" a yield to maturity I disagree (with some exceptions, of course).
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Re: Taxes paid on Tips
Old 02-10-2006, 09:36 PM   #5
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Re: Taxes paid on Tips

Quote:
Originally Posted by Rosalita
This is off topic - I was interested to know your thoughts on the difference between Bonds and Treasury notes with respect to the value of the investment potential and the safety in perserving the principal together with the interest.* *I'm new to Bonds or TIPs etc having kept to real estate, equities, CDs and MMs.*
Am I right that the Bonds payout depends upon the market rates fluctuating over a given year - that you are not locked into a specific rate.* How risky are they?
Rosalita: I'll take a stab at this. If you buy an indivdual bond, you are indeed locked into the specific rate that bond was paying when you purchased it. The value of that bond will vary over the period of time that you purchased it for. (If interest rates increase above the amount you purchased it for, your bond will be worth less if you cash in early. The reverse will happen if interest rates go down.

If you buy a bond fund (rather than an indivdual bond), the fund will replace older bonds with newer issued bonds as they go along. Interest rates rising, as they have for the last year or so,
will dampen the return on bond funds also.

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Re: Taxes paid on Tips
Old 02-13-2006, 10:27 AM   #6
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Re: Taxes paid on Tips

Thanks Jarhead. That answers the question for me.

Sorry if I wasn't very clear on my question.

Rosalita
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