Question: I own U.S. savings bonds that will no longer earn interest in 2015. My question: If I cash them in, is there any way to avoid paying income tax on that interest? I am an 80-year-old widow on a fixed income.
Answer, from Gregory Burke, a Sacramento, Calif., certified public accountant:
Under most circumstances, you cannot avoid paying tax on the interest you receive when you cash in U.S. savings bonds.
Assuming you did not elect to report the accrued interest on the bonds each year, you must report the interest either on the date the bond matures or the date you cash it, whichever is earliest.
There are, some instances where you don't have to pay income tax when cashing out savings bonds, such as when the proceeds are used for college tuition.
Qualified expenses are limited to tuition and mandatory fees at eligible institutions. There also are income limits on this exclusion. The exclusion for single taxpayers begins phasing out at incomes of $72,850 and above. For married taxpayers filing joint returns, the phase-out starts at incomes of $109,250.