Question: In a recent column (Apr. 20) you wrote about the phase-out of Series E bonds and their replacement by Series EE bonds. I don't remember seeing anything about this.What's the story?
Answer: In January Treasury Secretary W. Michael Blumenthal announced the introduction of New EE and HH bonds. On Jan. 2, 1980, these will replace the current E and H bonds (which will continue to be sold until the end of this year).
There are several important differences between the present E bond and the new EE series:
The $25 face value bond is eliminated. The lowest denomination available will be the $50 bond. (The new bonds will also be issued in face amounts of $75, $100, $200, $500, $1,000, $5,000, and $10,000.)
The purchase price will be one-half the face value, so the minimum $50 bond can be bought for $25.
The term of the bond will be 11 years nine months, and the bond will double in value (from purchase price to face value), by the maturity date.
The limitation on annual purchases will double, from the present $7,500 face amount to $15,000.
The new EE bonds will not be eligible for redemption until six months after issue (compared to the present two months).
But there is no change in the rate of interest paid to buyers. Interest will be accrued on a graduted yield curve that starts out at 4 percent and climbs to 6 percent after five years. After the fifth year the rate remains at a steady 6 percent (compounded semi-annually) until maturity.
This relatively low rate of return is probably the major drawback for the serious investor. But for many people this disadvantage is outweighted by the tax deferral feature and the convenience of payroll deduction.
Holder of Series E bonds will not be able to exchange them for the new EE bonds. However, after Jan. 2, 1980, E bonds can be exchanged for the new series HH bonds without current income tax liability of the accrued E--bond interest. (But exchange must be made within one year after a Series E bond matures.)
Q.: My son bought a car - but it looks like I'm going to end up making the payments. Can I deduct the interest expense on my tax return?
A: Maybe. There are two requirements for interest payments to qualify for a tax deduction: you must actually make the payments; and you must be legally liable.
So if you co-signed the note, making you liable for the loan payments if your son defaulted, you can deduct all the interest you actually pay.
If you are not a co-signer or guarantor, you may still qualify if you go to the lender and assume legal responsibility for the remaining payments.
Otherwise, the payments are simply considered gifts to your son, and the interest in not an allowable deduction.
Q: I retired last year and now do some consulting work. My wife helps out by typing reports. Is there anything wrong with paying her a small salary, then paying social security tax so she can qualify for social security on her own?
A: Good idea - but it won't work. A wife employed by her husband (or a husband employed by his wife) is exempt from social security and federal unemployment tax, according to IRS Circular E, "Employer's Tax Guide.?
And by "exempt" the IRS means "no way," no "optional." You can't cover a spouse or, for that matter, your child under 21.
If your wife is a legitimate contributor of time and effort to the business, however, you can form a partnership. As a partner, your wife would be eligible to pay social security tax on her earnings from self-employment, using Schedule SE on the annual tax return. (She would also be eligible for her won Keogh retirement plan.)
In forming the partnership, it is not required that earnings be split 50-50. In fact, it would be more appropriate to divide earnings in line with the contribution each partner makes to total partnership income.
You would of course have to file a partnership tax return each year. There is no tax imposed on the partnership itself, however; Form 1065 is an information return on which the various tax-related items are allocated to each partner.
A partnership should not be used solely as a "gimmick" to get social security coverage for your wife. But it is a permissible method for recognizing a bonafide contribution by a family member not eligilbe to be covered as an employe.