7.5 U.S. Savings Bonds

Which of the following is FALSE in relation to U.S. savings bonds?

• interest earned is received on a tax-free basis at the federal level

• U.S. savings bonds should not be used to hold the majority of a person's emergency fund assets

• interest earned is received on a tax-free bases at the state level

• interest earned is received on a tax-free bases at both the federal and state levels

Which of the following statements regarding the taxation of U.S. bonds is CORRECT?

• interest on I bonds is not taxable but interest on EE bonds is taxable

• interest on I bonds and EE bonds is taxed by the federal government when the bonds are redeemed

• if savings bonds' proceeds are used to pay for qualifying higher education expenses, such as college tuition and fees, the interest is only taxed by the state government and not the federal government

• interest on I bonds and EE bonds is not taxed by the federal government

Mike pays taxes at the 12% federal income tax bracket level. His state also has a 6% tax on investment income, including interest earned. If Mike were to cash in a U.S. savings bond for $300, which he originally purchased for $100, how much will he pay in federal and state taxes?

• $15

• $24

• $45

• $63

Answer explanation

find the difference of Mike's U.S. savings bond and what he originally bought it for then multiply by his federal income tax bracket as a decimal

(bond - original) x (interest decimal)

Thomas is 18 years old. He has $3,000 worth of EE bonds in his name. He received the bonds as gifts over the years. He is hoping to cash in the bonds and use the proceeds for college. Which of the following statements is TRUE in relation to his goals?

• because he is using the bonds for college, he will not owe taxes when the bonds are redeemed

• because he is younger than age 24 and sigle, he will not owe taxes when the bonds are redeemed

• because he is younger than age 24, he will need to pay taxes on the interest earned when the bonds are redeemed

• because he received the bonds as a figt, he must pay taxes on the full amount of the redemption

Assume Jasmine has owned an EE bond for 3 years. If the fixed rate of interest is 2%, how much must she report in interest income each year she owns the bond?

• $10

• $20

• $122

• $0

Assume Jasmine has owned an EE bond for 3 years. The fixed rate of interest is 2% and the current value of the bond is $2,000. If Jasmine were to cash in the bond tomorrow, how much interest will she lose (approximately) as a penalty?

• $0

• $10

• $20

• $40

Answer explanation

Annual interest/12 = monthly interest

(monthly interest * 3 months) / 100 = penalty percentage as a decimal

decimal * current value = ANSWER

Linda like the idea of using a portion of her federal income tax refund to purchase a U.S. savings bond. Which of the following statements is TRUE regarding this investment possibility?

I. the minimum investment for an EE bond is $50 using her tax return

II. the minimum investment for an EE bond is $25 using her tax return

III. the minimum investment for an I bond is $50 using her tax return

• I only

• III only

• I and III only

• II and III only

How can Karina redeem a U.S. savings bond?

• cash in the bond at a local bank or credit union

• cash in the bond with her employer if the employer offers U.S. savings bonds as an employee benefit

• cash in the bond when filing her federal income taxes

• cash in the bond at a local bank, when filing her federal taxes, or with an employer who offers U.S. savings bonds as an employee benefit

Savings bonds are:

• Issued by the United States Department of the Treasury

• Considered one of the safest investments

• Earn interest for 30 years unless you cash them in early

• All of the above

All are benefits of saving, except

• safe, reliable, convenient

• earns a higher return of interest

• earns a small amount of interest

• insured by the FDIC