Guide to Investment Bonds and Taxes


Table 4-2 illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of the average basis method (discussed next). You may have to use a basis for figuring gain that is different from the basis used for figuring loss. See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses related to the sale (such as redemption fees, sales commissions, sales charges, or exit fees).

  • If you are married and filing jointly, the contribution limit starts to decline at $105,000.
  • A financial asset, for this purpose, is any equity interest in a pass-through entity.
  • Be sure that you understand the rules and confirm your eligibility before claiming any deductions.

This affects whether your capital loss is long term or short term. These mutual funds, generally, are traded on an established securities exchange. These funds do not pass investment expenses through to you. Instead, the dividend income they report to you in box 1a of Form 1099-DIV is already reduced by your share of investment expenses. As a result, you cannot deduct the expenses on your return.

Currency risk

Savings bonds issued by the government offer safety for your cash and a decent return in interest. They are a time-tested investment that now competes with a wide range of other savings vehicles, such as certificates of deposit and money-market accounts. Savings bonds offer no real tax advantages over these other “time deposits,” with one exception related to education expenses. Zero-coupon municipal bonds, which are bought at a discount because they do not make any interest or coupon payments, don’t have to be taxed. As long as you’re investing in a local municipal bond, taxes won’t be a concern.

The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. For this purpose, a related person is any related party described under Related Party Transactions, later in this chapter. The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit.

How Are Municipal Bonds Taxed?

Because it’s an investment, purchasing an I-Bond is not tax-deductible. You can also purchase I-Bonds for other people, including family members. However, their total I-Bonds purchase and received gifts for the year can still not exceed $10,000. You can purchase I-Bonds through the Treasury Direct website. You can purchase paper I-Bonds in $25 increments and electronic I-Bonds in any amount from $25 to $10,000.

These rules do not apply to options dealers and commodities traders. If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of two ways. If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. Nonqualified preferred stock is generally treated as property other than stock. Generally, this applies to preferred stock with one or more of the following features.

Cashing in I Bonds

If, in Example 1, the executor had chosen to include the $200 accrued interest in your uncle’s final return, you would report only $300 as interest when you cashed the bond. The manner of reporting interest income on Series E, Series EE, or Series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. If you use the cash method of reporting income, you can report the interest on Series EE, Series E, and Series I bonds in either of the following ways.

Table 1-2. Who Pays the Tax on U.S. Savings Bond Interest

Use Form 8815 to figure your interest exclusion when you redeem qualified savings bonds and pay qualified higher education expenses during the same year. On Schedule B (Form 1040), line 1, include all the interest shown on your Form 1099-INT as well as any other taxable interest income you received. Several 5 ways to recruit more volunteers for your nonprofit rows above line 2, put a subtotal of all interest listed on line 1. Savings Bond Interest Previously Reported” and enter the amount figured on the worksheet below. Under method (3) above, figure accrued market discount for a period by multiplying the total remaining market discount by a fraction.

A straddle is any set of offsetting positions on personal property. For example, a straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period. You purchased an option to buy 100 shares of XYZ Company stock.

Enter the result on Schedule D (Form 1040), Part III, line 16. If your losses are more than your gains, see Capital Losses, next. If both lines 15 and 16 of your Schedule D (Form 1040) are gains and your taxable income on your Form 1040 is greater than zero, see Capital Gain Tax Rates, later. Instead, the loss will be carried over to the following tax year, subject to any further application of Rule 1 in that year. This rule will also apply if you entered into a contract or option to acquire the stock or securities within the time period described above.

Even though the federal government does not allow you to deduct the contributions you make to a 529 plan on your federal tax return, those contributions are often deductible on your state tax return. The rules regarding tax deductibility of contributions are made on a state-by-state basis. The difference between the net present value and the principal payment at maturity is taxed at a capital gains rate of 15%.