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Series EE bonds about to lose their appeal

Updated: May 3, 2013 12:14PM

Originally published: April 11, 2005

At this time of year, I traditionally write a column about last-minute tax tips, but first an important bulletin for everyone who buys Series EE savings bonds: The federal government is dramatically changing the rules on Series EE bonds.

The Treasury has announced that the interest rate paid on Series EE bonds purchased after May 1 will no longer be changed every May and November to keep up with prevailing rates on Treasury notes. Instead, for new bond purchasers, the rates will be fixed for the 30-year life of the bond.

So, for all those loyal savings bond buyers who have been helping to finance our national debt -- not to mention their own future dreams -- the government is taking away the promise of floating rates just when interest rates are starting to rise!

Bonds already outstanding, and those purchased before the May 1 deadline, will continue to earn floating rates as the Treasury promised when you purchased them. But the rate on Series EE bonds purchased after May 1 will be set for the lifetime of the bond. The new fixed rate decree does not affect purchases of Series I bonds, which carry a built-in inflation adjustment.

My advice: Don’t buy another Series EE bond until you’re convinced that rates have reached their absolute peak for the cycle. (You’ll only know that in hindsight!) At that point, you might consider locking in that fixed rate.

If you have a regular Series EE savings bond payroll deduction plan, cancel it or switch to purchases of Series I bonds.

Of interest

While the Treasury is becoming stingy about paying interest to savings bond buyers, it is definitely not restrained about collecting interest and penalties from people who owe on their income tax bills.

For instance, if you don’t file your income tax return on time, you’ll owe a penalty of 5 percent per month on the amount of taxes you owe! Thankfully, there’s a limit: The penalty caps out at 25 percent of the tax owed. The minimum penalty for failure to file is $100, or the amount of the tax owed, whichever is lower.

That is a good argument for filing your federal income tax return by April 15 (Friday). If you absolutely can’t get it done, you should file Form 4868, the official request for a four-month extension, until Aug. 15.

You’re not required to include a check for estimated taxes owed in order to get that extension. But if you haven’t paid at least 90 percent of the taxes you owe, you’ll be hit with a late payment penalty when you finally do file your return. That penalty is 0.5 percent of the amount owed per month that payment is late.

And then, there’s interest. Even if you file for an extension, you’ll be charged interest on the balance you owe. The rate changes quarterly, but is currently 6 percent, compounded daily. It will be hard to match that return at your local bank or S&L!

None of this is good news if you’re a procrastinator. Get your return done, and your taxes paid or your financial problems will literally compound. If you simply can’t find the money to pay the taxes, there is one more step you can take.

When you file the return, without a check, attach Form 9465 to the front of the return. This is a request to pay the taxes owed in installments. You’ll be asked to specify the monthly amount you can pay. The IRS charges a set-up fee of $43 for these arrangements. And you’ll still owe interest and penalties on the unpaid amount.

But the penalty of 0.5 percent per month is cut in half when the IRS agrees to your installment payment plan. And you won’t be subject to the late filing penalty.

If you absolutely can’t find the money to pay your taxes, you could submit an “offer in compromise” to negotiate a lower tax bill. This is by no means automatic, and will open your entire personal financial situation to IRS scrutiny.

Tax freedom: May 31

Most of the time, we think about the government’s budget deficit as something “they” owe. Now it becomes personal. “They” need your income tax money.

To put this in perspective, Tax Freedom Day is May 31 this year. That means that up until May 31, everything you earned goes to pay for some form of federal government tax!

And it will be very costly if you don’t pay up. That’s The Savage Truth.

Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s newscasts. Distributed by Creators Syndicate.

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