Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

INVESTING IN I BONDS

by Andrew D. Schwartz, CPA

Worried that the stock market is too high and is poised for a correction?  What do you think about the current interest rates?  At some point, they have to go up, don't they?  And who isn't in favor of deferring income taxes on their investment income?  If these are your concerns, take a look at the I Bonds issued by the United States Treasury.

Inflation-Indexed Series I bonds are an alternative to stocks, bonds, and mutual funds.  The I Bond is issued by the U.S. government at a stated interest rate that is 1.1% higher than the rate of inflation.  Semi-annually, the interest rate is reset based on the Consumer Price Index (CPI) of the previous six months.  Last November, the fed determined that inflation was running at an annual rate of 1.09%, so these bonds are currently yielding 2.19%.  In May, the rate is due to be adjusted again.

Everyone is painfully aware of what happens to their equity mutual funds when the stock market goes down.  Do you know what happens to most bonds funds when interest rates rise?  Since bonds generally move in the opposite direction of interest rates, when rates rise, bonds decrease in value.

Let's look at a simple example where you purchase a $10,000 bond yielding 5% interest that pays you $500 per year.  What happens if interest rates jump to 10%?  Believe it or not, the value of your bond gets cut in half, since someone could now earn the same $500 of interest by purchasing a $5,000 bond.  

A big benefit of I Bonds is that they work just the opposite way of most other bonds.  When rates increase, the amount of interest paid to the owners of I Bonds increases as well, causing the value of the bond to go up.

I Bonds also allow you to defer paying taxes on the interest earned.  You get to decide whether you'll report the bond's interest on your tax return each year, or hold off paying the taxes due until the year the bond is either redeemed or reaches maturity.  Plus, the interest earned on bonds issued by the U.S. government is exempt from your state's income taxes. 

An I Bond's interest might even be tax-free to you if you cash in the bond to pay for a child's college education.  To take advantage of this tax break, you or your spouse must be the owner of the bond, and your income cannot exceed a certain threshold the year the bond is redeemed.  For 2003, the threshold was $117,750 if you're married or $73,500 if you're single.

Each year, you can purchase up to $30,000 of I Bonds.  They are available in denominations of as low as $50 to as high as $10,000.  To find out more about this unique savings opportunity, visit www.treasurydirect.gov.

 TOP

WHEN APRIL 15TH MEANS APRIL 15TH 

by Andrew D. Schwartz, CPA

April 15th is just around the corner.  Even though that's the due date for filing your income tax returns, the IRS lets you extend the deadline to August 15th simply by filing a Form 4868.  And if you owe money, you can even hold off paying the greater of 10% of your tax liability, or $1,000, until August 15th as well.  (Expect to be charged interest on the balance due, and possibly even a penalty of 0.5% per month, but you shouldn't be hit with the 5% per month Failure to File penalty.) 

When it comes to your IRAs, however, the deadline to put away money for 2003 is April 15, 2004 and cannot be extended.  This applies for traditional and Roth IRAs, and for Education Savings Accounts, which up to a few years ago, were known as Education IRAs.  Let's take a look at these tax-advantaged savings opportunity.

Traditional and Roth IRAs

For 2003, you have until April 15, 2004 to put away up to $3,000 into your Roth IRA or traditional IRA.  Anyone 50 or older by December 31, 2003 can sock away an additional $500.  Your contributions into a traditional IRA may or may not be tax deductible, depending on your income and whether you (or your spouse) were covered under a retirement plan last year.  The threshold is currently $50,000 for single individuals and $70,000 for married couples.

Here's where the rules get a little confusing.  No matter how high your income was last year, you can deduct your IRA contributions if you're single and weren't covered under an employer sponsored retirement plan last year.  For married couples, both spouses must not have been covered during the calendar year.  To determine if you or your spouse were a retirement plan participant last year, take a look at your W-2s and see if the "retirement plan" box was checked.

If you're married, and only one of you participated in an employer-sponsored retirement plan last year, then you can make a deductible IRA contribution on behalf of the uncovered spouse as long as your Adjusted Gross Income (AGI) is less than $150,000.  Between $150,000 and $160,000, the deductible contribution phases out ratably.

Contributions to a Roth IRA are never tax deductible.  Instead, the money invested within a Roth grows tax-free, as long as you hold off taking distributions from the Roth in excess of your contributions until reaching the age of 59 1/2, or withdraw no more than $10,000 of your earnings within your Roth IRA for first time home buyer costs. 

High income taxpayers aren't allowed to contribute to a Roth IRA.  Currently, the phase-out is between $95,000 and $110,000 for single individuals and $150,000 and $160,000 for married couples.

Education Savings Accounts

When education IRAs first came out in 1998, you could only contribute $500 per child per year.  Along with a name change, the annual contribution was quadrupled to $2,000, making them an attractive alternative to 529 plans and other college savings options.

Like Roth IRAs, money invested into an ESA grows tax-free.  And unlike 529 Plans, distributions taken from an ESA to pay for eligible expenses will continue to be tax-free, even after 2010 when the 2001 Tax Act is scheduled to sunset.  Plus, ESAs can be used to pay for private high school and elementary school. 

ESAs, like their cousin IRA, have income limitations as well.  Single individuals whose income exceeds $110,000, and married couples whose combined income exceeds $220,000, aren't allowed to contribute to ESAs that year.  Partial contributions are allowed for single individuals whose AGI falls between $95,000 and $110,000 and for married couples whose AGI falls between $190,000 and $220,000. In either case, it's okay to have another person such as a family member or friend contribute to your child's ESA that year.

April 15th Deadline

Even if you'll be taking an extension to file your income tax returns, there's no extending the April 15th deadline to contribute $3,000 into your IRAs and $2,000 per child into your ESAs for 2003.

TOP

Copyright - CPANiche, LLC - 2004