Am I an accrual or cash method taxpayer?

Friday, March 24th, 2006
Categorized as: Savings Bond taxes

I purchased a Series I Savings Bond through Treasury Direct. Am I using accrual method accounting or the cash method? The IRS instructions say this will decide whether I should report Savings Bond interest as income each year or later – either when I cash the bond or it stops paying interest.

Tom’s response

Whether you are an accrual or cash method taxpayer has nothing to do with TreasuryDirect or even with owning Savings Bonds. Like most of us, you are undoubtedly a cash method taxpayer.

If you were an accrual method tax payer, you’d know it because you’d have to keep accounting records that put your income and expenses in the year they occurred rather than in the year you received or submitted payment.

For example, say you are a cash method taxpayer and your friend is an accrual method taxpayer. You both do some part-time work in December that you are paid for in January.

Your accrual-method friend would include the income in December, because that’s when the work was done.

Your cash-method self would include the income in January, because that’s when you were paid. Thus the two of you would put the income in different tax years.

Most of us are cash method taxpayers. Unlike accrual method taxpayers, we have the choice of either putting Savings Bond interest income on our tax returns each year or waiting until we redeem the bond or it stops paying interest, whichever comes first. And almost all of us put the taxes off until later.

Accrual method taxpayers, on the other hand, are required to report Savings Bond interest income annually. In addition, there are some other situations in which it makes sense to pay the tax annually. For more information on why and how to do this, see my post on how to declare Savings Bond interest each year.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

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June 1, 2010

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Tom Adams

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