Slipped into the latest tax bill was a tiny provision that could prove a big help for parents saving for their children's college tuition.
Interest on Series EE bonds bought after Jan. 1, 1990, will be tax-free if those bonds are cashed in to pay for tuition.The prospect of being able to buy bonds with the tax advantages in just over a year from now may put a damper on the sale of Series EE bonds in the near term.
But there are still some good reasons for investment in savings bonds before then. And there are some peculiarities about the new rules that should be considered carefully.
For example, the tax break will apply only to bonds that are bought and owned by a student's parents. That means grandparents who want to buy bonds for their children and other people who want to buy bonds in children's names have no reason to wait for 1990.
It is useful to compare bonds bought now in a child's name and bonds bought next year by parents. Under current law, savings bond interest is exempted from state and local taxes and federal taxes are deferred until the bond is cashed in.
So bonds held in a child's name are not subject to any taxes until they are cashed in. Then, if the child is 14 or older, that interest will be taxed at the child's tax rate, which is likely to be lower than the rate for parents, particularly if the child is a full time student.
Of course, to have no taxes would be better than having low-rate, deferred taxes but the difference may not be vast enough to justify delaying the bond-buying plan for a year.
There is one other reason for switching to parent-held bonds in 1990. Parents who hold the bonds in their own names, rather than buying bonds in their child's name, have more control over the money.
One financial planner likes to tell the story of a wealthy client who had saved a hefty college tuition fund in his child's name, only to have that child quit school, take the money and dedicate his life to following rock 'n' roll concerts as soon as he turned 18.
And there is one more important piece of fine print in the new rules. The forthcoming tax breaks are aimed at middle-income families. They fade away on a sliding scale starting at family-income levels of $60,000 and disappear entirely for families earning more than $90,000.
Even without the 1990 bonus, savings bonds remain a viable means of saving.