Kozlog Blog

Children and US Savings Bonds: A Good Tax Strategy

Tue, 9 Sep 2025 17:08:22 -0400

Do you have a young child or a grandchild and want to help their financial future? US Savings Bonds are a great idea. Before getting into the tax advantages, a brief explanation of the two types of savings bonds - EE series and I series.

The EE series bonds are guaranteed to double in 20 years regardless of the current interest rate. The current interest rate is 2.60%. Even though 2.6% is not enough to double the value in 20 years, the US government will pay double after 20 years.

The I series bonds have a current interest rate of 3.11% which is adjusted with inflation every 6 months.

Both can be purchased for as little as $25 with a maximum annual purchase of $10,000. The bonds will continue to pay interest until 30 years. If you want the money sooner, you can get it after five years without a penalty. You cannot cash it in before one year. You can cash it in between one and five years but there is a penalty of 3 months of interest.

Why are they a good tax deal? There are two reasons. If you own the savings bonds, then you can cash them without taxes in any year when you spend money on your child’s college tuition (assuming no other tax deduction or credit for the same dollars). Also, they are never taxable to the state — regardless of the state.

Another tax ploy is to put the savings bonds in your child’s (or grandchild’s) name. Here is a fun fact — you have the choice to pay the tax on the interest annual or when you cash in the bond. Children usually do not have any wages. The interest on the savings bond is considered “unearned income” as is bank interest and investment dividends. Children without earned income (like wages) can have up to $1,350 of unearned income before they have to file a tax return. The trick is to claim the income as taxable each year but the taxable income is below the $1.350 threshold (which adjusts for inflation). Therefore, no tax filing is needed. Then, when the child does have to file a tax return (likely due to a summer job), then they will claim the interest for that year. If their income is below the standard deduction (currently $15,750), then they can have $350 of interest before paying any taxes. When they head off to their adulthood adventure, they can cash in the savings bonds and will have very little taxable interest income.

Let’s look at an example (ignoring inflation so tax rates are the same as today, for simplicity):
A child is 2 years old in 2025. Grandparents buy a $1,000 EE series savings bond with 2.5% interest (for easier calculations). Parents also buy a $1,000 EE series savings bond.
Year 2025: interest is $10 for each bond or $20 total because it was bought around now, no tax due
Years 2026 - 2039: interest each year is $25 per bond or $50 total. Child was 3 - 16 with no other income.
Year 2040: Child is 17 and earns about $4,000 in a summer job. Below the standard deduction. Bond interest remains $50.
Years 2041 - 2044: Child is in school and earns between $5,000 and $15,000 each year. Interest is $50. Child also has bank interest of $30. All is below the standard deduction and unearned income limits, so no taxes due.
Year 2045: Child graduates from college and bonds reach 20 year maturity. They are guaranteed to double by then. Bonds are worth $2,000 each. Child cashes them in and uses them to help start life. Earns about $20,000 for the 4 months of work after graduating. Interest is $30 total (partial year since cashed out in August). Tax is $3 on the interest.

The result is $4,000 for the child. Only $3 of tax is paid on the $2,000 of interest.

It’s something to consider. But you MUST make the election with the first tax return to claim the interest each year.

Childcare Credit vs FSA

Wed, 16 Jul 2025 00:00:00 -0400

The US tax code provides a small assistance for childcare and dependent care. There is a tax credit available to all and a pre-tax payment offered by some employers. The following will explain how to determine which is best for your situation.

Let’s first discuss who qualifies. The recipient of the care must be a child under 13 years old or a person who is physically or mentally incapable of caring for themselves. For a taxpayer to get the tax credit or deduction, the child or person receiving the care must be a dependent of the taxpayer or the spouse of the taxpayer who lives in the same house for at least half the year. The rules about claiming dependency would consume this blog. For this discussion, let’s just summarize and say the recipient should be one who lives with you more than half of the year and for whom you pay most of their living expenses.

The expenses that can be claimed are day care, summer day camps (not overnight camps), before and after school care, and pre-school. Payments for private grade schools are not allowed for this credit or deduction.

To receive either tax benefit, both the taxpayer and the taxpayer’s spouse (if married) must be employed, self-employed, or in school full-time. If the spouse is the one receiving care, then the spouse is not expected to be employed or in school. Essentially, the tax benefit is to provide for care while the taxpayer(s) is earning income (or going to school). There are special rules for married filing separately which are too complicated for this blog.

A credit is a direct reduction of taxes while the pre-tax payment, like a deduction, is a reduction of taxable income. Assume a married couple has $101,500 of wages — $60,500 for one spouse and $41,000 for the other. After the standard deduction of $31,500, their taxable income is $70,000. Their taxes would be $7,923. If they received a $1,000 credit, their taxes would be $6,923. If they received $1,000 of pre-tax benefit (like a deduction), then their taxable income would be $69,000 and their taxes would be $7,803.

First, let’s discuss the tax credit. This allows up to $3,000 of child care expenses for one child or $6,000 for two to be claimed for a credit. The credit is then calculated as a percentage of the child care expenses. Starting in 2026, the percent is 20-50% depending on income. Since 20% is the floor (lowest percentage), let’s just use 20%. With the high cost of child care, most people pay more than $3,000 per child during the year. Therefore, this credit is usually $600 for one child or $1,200 for the second.

The second option is a payroll deduction through a dependent care Flexible Spending Account (FSA). There is also an FSA for health care but that is not part of this discussion. The dependent care FSA allows an employee to have up to $7,500 set aside pre-tax for child care, regardless of the number of children. ($7,500 is new for 2026. Previously, it was $5,000.) Using the example from earlier, the income on the tax return would drop from $101,500 to $96,500 and the taxable income would drop to $62,500. Not all employers provide this option. Notice that the maximum for the credit is based on $6,000. If the taxpayer has two children, they can use the FSA for $7,500.

If your employer provides this option, should you take it? That depends. The most benefit you can get via the credit (assuming the 20%) is $600 for one child and $1,200 for two children. The most you can get from the FSA depends on your tax bracket. If your tax bracket is less than 20%, then the 20% from the credit is better. If your tax bracket is higher and you have one child, the FSA is best. For two children, there is a small range where the tax credit remains the better option. The following shows suggestions based on 2025 tax brackets and assuming the standard deduction, but using the new FSA maximum and tax credit percents. (The 2026 tax brackets and standard deduction are not yet available. This is a close approximation.):

Filing Status AGI # of children FSA or Tax Credit
Head of Household < $85,000 1 Tax Credit
Head of Household > $85,000 1 FSA
Head of Household <$96,000 2 Tax Credit
Head of Household >$96,000 2 FSA
Married Filing Jointly <$134,450 1 Tax Credit
Married Filing Jointly >$134,450 1 FSA
Married Filing Jointly <$182,000 2 Tax Credit
Married Filing Jointly >$182,000 2 FSA

Bonuses, RSUs, and Withholding Issues

Sun, 16 Apr 2023 16:54:33 -0400

As I mentioned in my blog on married couples and withholdings, the US government taxes wages and requires employers withhold most of those taxes from each paycheck. When you start a job, you are asked to complete form W-4. This tells your employer some information about you so they can use the best table to determine the taxes which will be withheld from your paycheck. Â This is for regular wages and not for bonuses or other lump sum payments such as Restricted Stock Units RSUs) granted.

There are multiple sets of withholding tables to cover taxpayers with weekly, bi-weekly, bi-monthly, and monthly paychecks. The tables exclude a portion of pay that can be attributed to the standard deduction and child tax credits as requested by the taxpayer on the W-4.

These tables do not address bonuses, RSUs, and other situations where there are lump sum payments. Instead The IRS requires that employers withhold 22% of the payment for taxes. The exception is for employees who earn $1M or more, for whom 37% is withheld for taxes. Unfortunately, 22% is often not the correct tax rate which results in large tax payments of refunds at tax filing time.

Let’s look at two examples. Note that I use round numbers for simplicity and not the exact standard deduction numbers, which are adjusted annually for inflation. A married couple has joint annual income of $350,000 and $26,000 of interest and dividends on investments. Then one spouse gets a $50,000 bonus. The taxes are withheld at 22% or $11,000. Their adjusted gross income (AGI) is $350,000 + $25,000 + $50,000 = $426,000. The taxable income is the AGI minus the standard deduction (or itemized deduction if that is better). Using $26,000 for the standard deduction, the taxable income in this example is $400,000. As you can see if the tax bracket table above, this places the taxpayers in the 32% tax bracket for their highest income. The withholding on the bonus was only at 22%. A portion of the bonus, $35,800 ($400,000 - $364,200), will be taxed at 32% and the rest ($14,200) will be taxed at 24%. The 22% withholdings is too low and the taxpayer will owe $3,864.

To add to the tax burden, the investment income of $26,000 is unlikely to have had any taxes withheld. If the couple had children, the bonus may have pushed them out of qualifying for the child tax credit. In this first example, the client will likely owe $8,000 - $10,000 with their tax filing.

At the other end of the spectrum is the client that earns a low base pay of $3,000/month and $60,000 of bonus and commissions with a spouse that does not work. The result is a total AGI of $96,000. This client has two children. After subtracting out the standard deduction, the taxable income is $70,000. That puts this couple in the 12% tax bracket and they qualify for the $4,000 child tax credit. The 22% tax withholding on the $60,000 is too high. This couple will get at least $6,000 as a refund. From a cash flow perspective, it would have been better for this couple to have $500 per month and no refund.

If you receive significant bonuses (over $10,000 each year), then we should consider how to handle the withholdings. You generally have four options:
1. Wait until the tax return to calculate and pay the extra, but this might cause a small penalty/interest charge and could be a painful bill.
2. Increase your withholdings by adding a number to line 4 of your W-4, but how much? That depends on the bonus amount which you likely don’t know at the start of the year. This can also cause a cash flow issue during the year.
3. Pay an estimated tax payment when you get the bonus. You can just shoot me an email and we can calculate.
4. Ask if your company will withhold your federal tax on your bonus at 32% or 37% instead of 22% (some do and some won’t)

As always, I am here to help you through these situations.

Filing Jointly, 2 Jobs and Withholdings

Sun, 16 Apr 2023 16:42:58 -0400

The US government taxes wages and requires employers to withhold most of those taxes from each paycheck. When you start a job, you are asked to complete form W-4. This form tells your employer some information about you so they can use the best table to determine the amount of taxes to be withheld from your paycheck. The IRS changed the W-4 form in 2019 to better align it with the December 2017 tax reform changes. Unfortunately, it has caused confusion with married couples who file jointly and both work. An inappropriately completed W-4 can cause a taxpayer to owe a lot with their tax return or create a large refund.

For married couples who file jointly the easiest way to complete the W-4 is to mark “single or married filing separately.” While this may seem incorrect, I’ll explain later why it is the best. The number of children under 17 should be divided between both spouses W-4. If there are two children, generally, each parent should only claim one. If there are an odd number of children, the parent with the higher income should claim the higher number of children. If the joint income of both parents exceeds $400,000, then no children should be claimed. Note that earlier I said children under 17. The child tax credit for these children is $2,000/year. The credit for children 17+ is only $500. I generally tell parents not to include these children on the W-4 unless they are eligible for the American Opportunity Tax Credit (AOTC). If your children are turning 17, we should discuss your W-4 withholdings.

Now for the reason I recommend completing the W-4 as single and only claiming half your children. The US tax on wages allows for a standard deduction (at a minimum) on which you pay no taxes. The tax code also has progressive tax brackets. Progressive tax brackets mean that as you earn more money, the higher income is taxed at a higher rate. The standard deduction and the tax brackets are adjusted for inflation each year. For simplicity in this explanation, I am going to use round numbers in the example. Please note, they are not accurate numbers, but close. I am also going to use 26 pay periods per year, which is every two weeks. I realize that some people are paid weekly, others monthly, and others bi-monthly, but every two weeks is the most common and makes the math simpler.

The standard deduction is about $13,000 per taxpayer (ignoring head of household taxpayers) or $26,000 per married couple. Assume that you mark “single” on your W-4 and your spouse also does. This means that every paycheck, the first $500 ($13,000 / 26 pay periods) is tax free from each of your paychecks. If you are paid $2,000/pay period, the withholding tables will remove the first $500 before calculating the taxes on the remainder. Together, you will have had $26,000 treated as not taxable.

If instead, you both mark “Married filing jointly,” then the withholding calculations will consider the first $1,000 as tax free. At the end of the year, the total wages without taxes withheld will be $26,000 each or $52,000. But your standard deduction is only $26,000. Therefore, you will not have paid taxes on $26,000 and that will be due in April with your tax return. If you are the only income earner in a married couple, then it is appropriate for you to mark “married filing jointly.”

This same concept occurs with claiming the child tax credits and when calculating the taxes in different tax brackets. The “married filing jointly” box will have about half the taxes withheld than necessary. That results in a painful amount of taxes due in April. Also, your withholdings are usually only on wages, not investment income. This could cause you to owe even more with your tax return.

Technically, you can mark “married filing jointly” if you also remember to mark the “2 income” box in Step 2. I have seen one company that did not properly register that box and my client had under withholdings despite completing the form properly. For that reason, I just prefer that you mark "single or married filing separately.” Marking this on your W-4 does not require you to file that way. It is solely for calculating tax withholdings.

If you have any changes in your life -- spouses loses a job or starts a job, a child becomes 17, you pick up a side job, you get a significant increase in investment income, you get divorced, etc. -- it is important to look back at your W-4 and adjust as necessary. If you are a client, please reach out to me during the year to discuss.

Time to Simplify Taxes

Fri, 9 Jul 2021 13:50:03 -0400

Wow!
I knew that the IRS had a tough year and received lots of calls — over a thousand a second at some point in the tax season. That was shocking enough and then I saw the actual numbers.

The IRS actually answered more calls than in past years. They have always struggled to answer all the calls, but when the calls are 3 and 10 times the numbers from past years, there is no way they could have handled it.

Looking at the phone line for 1040 questions, this does not mean that 7.89 million people needed help in 2018. It means that the phone rang that many times. Remember that 2018 was just weeks after Congress changed the tax law and people were struggling with the new rules. Assuming 20% of the individuals were able to get through to an IRS person the first time they dialed a number, that means that 80% had to dial again. Continuing with the 20% success rate assumption, then 64% needed to dial a third time and 51% a fourth time. I suspect many people gave up after a while but 2.4M were helped.

For 2021, the number of calls was nearly 10 times the number in 2018. This was not just the same 2.5M calling multiple times. Clearly, millions more were looking for help. Looking at my own practice, it likely included people asking how much they were paid in stimulus, what happened to their 2019 tax return, why was their 2020 refund delayed, what do they do about unemployment, how do they handle PPP loans, and much more.

Many in Congress have screamed for a more simplified tax code. The reasons vary from the burden on taxpayers to the removal of loopholes and credits and deductions for people and businesses with lobbyists. I whole heartedly agree that we need a simplified tax code.

During the 2016 Presidential election, many candidates promised to simplify the code, even promising a postcard. (As I discussed in my book “The Voters’ Guide to Tax Policy,” a postcard will not be possible, but simplicity can be.) Instead, these same candidates passed the Tax Cuts and Jobs Act which added complications. While those were Republicans, the Democrats added complications in the American Rescue Plan Act. Together, both parties added complications during the pandemic with the CARES Act.

We are now facing a crisis in administration as evidenced by the number of calls looking for help. Congress needs to either simplify the tax code for both individuals and businesses and remove sections that are for special interests or seriously staff up the IRS and require finance and tax education in high schools. It seems to me that the former is easier and more efficient.