The United States has some of the most stringent tax laws in the world. If you are an American citizen who lives abroad, your earnings are subject to tax. There are very few things within the American economy that are not taxable, and savings bonds are no different.
Firstly, we must establish the difference between the two main savings bonds you can get in the United States:
- Series EE bonds
- Series I bonds
Other savings bond products have been made available and have since been discontinued. However, these two savings bonds are currently available for citizens and can only be purchased online through the Treasury website.
Both of these investment products are roughly the same – the primary difference is that the interest rate on EE bonds is fixed. However, Series I bonds are specifically designed to shield investors from the negative impact of asset depreciation because of inflation.
The second point is that EE bonds offer a guaranteed return that doubles your investment once you have held onto it for 20years, but you do not have the same promise with a Series I bond.
Impact On Taxes
The interest paid on a savings bond is not taxed at a local or state level. However, it is subject to tax at a federal level. It is always good to plan for retirement or leave money for your loved ones after you pass. However, anything left in the bond and passed on to your next of kin is also subject to tax.
There is a level of flexibility involved, though, and you can look to pay the tax once the bond has matured or whenever you decide to cash in. Although these products are considered the safest way to invest your money, if you have to draw on it prematurely for whatever reason, you will be penalized and lose money.
However, this is a management cost, not something you typically envisage beforehand. You will receive marginal gains if you do not touch the bond.
Is This The Same For All Investments?
You could be subject to different taxes depending on your investment type and how much money you make. If you are unsure how much tax you must pay or what you must do once you have cashed in your investment, you must speak to a tax professional who can advise you accordingly.
Irrespective of whether you have a fixed product like a bond or savings account, or you own money in property, commodities, business abroad, cryptocurrency or a whole host of other investments, there will be some level of tax it will be subject to in the US, so it is best to plan accordingly.
Real estate investment is attractive, and if you want to go into business investing in property, it is essential to consider the tax laws. However, institutional investors have started investing heavily in the sector, which can sometimes signify that it is worthwhile.
What If I Keep My Money In The Bond?
If your bond continues to appreciate and returns a profit, you can keep it there for decades and then inform the IRS once it matures. You do not need to tell them every year of the individual incremental movements in the bond if you are not planning on cashing it anytime soon.
These bonds are designed for people to hold over several decades, so the IRS would be inundated with annual reports if such were required. As long as you keep your records entirely up to date when you are about to pay tax and when the bond matures, there shouldn’t be an issue, but we can’t stress how important it is to consult a tax professional to ensure your calculations are correct.
No two people have the same circumstances, net worth and tax arrangement. Take for example, running a mature company with a modest profit margin. You will be liable for different taxes than a large conglomerate multibillion-dollar corporation that operates across multiple continents.
Although savings bonds don’t specifically impact your tax, any profit is taxable. If you are in the fortunate position off making money on your investment, you must keep a concise and accurate record of just how much profit you have made over the tax year.
Provided that you can keep this information and plan accordingly, you can make your investments pay off and help supplement your income during times of hardship. Holding an investment doesn’t require any specialist declaration, nor will it impact your tax unless the profit is so great that it takes you up into a higher tax bracket. However, that’s a different situationfor another day.