When it comes to the world of finance, many of the different financial services that you can provide or be provided by another organization can often lead to a lot of confusion for newcomers in the field.
Take the use of mutual bonds, for example.
These are a very common form of investment or financial security that are used across the United States, and the rest of the world.
But often, many people will wonder whether or not their taxes can be affected, whether they are the person that established the bond, or if they are the person receiving the funds that have been made or saved by the bond.
This can especially be the case if the issuer of the bond isn’t necessarily from a large organization, such as the government or a large and established bank.
So, how exactly do they affect your taxes in this scenario? Well, that’s what we’re here to discuss!
We’re going to explain to you what exactly a bond is, whether they are taxable and can be affected by taxes, as well as whether the type of bond you have can be taxed or not in the first place.
Contents
What Are Bonds?
To bring everyone up to speed on what exactly a bond is, a financial bond is a security asset that is very similar to a loan in many ways, where the issuer, otherwise known in financial terms as a debtor, owes a certain amount of money to the holder of the bond who paid the initial money, or the creditor, in the form of debt.
The debtor is then financially or legally obligated to pay this debt back over a certain amount of time the amount that was given to the debtor, plus any interest that has accrued over the period that was established.
Often, this interest is paid back in specified intervals that were part of the original deal, and can be multiple times a year, once a year, or even more infrequently than that.
It is also possible for a creditor to make a bond that is in another person’s name so that they receive the total money and interest back after that allocated period.
Can Bonds Be Taxed?
So, now that we have explained what exactly a bond is, we can now move on to the main question of this piece.
Are bonds subject to taxes? And, if they are, are they affected in the same way that incomes are?
Well, to answer a very complicated question simply, the answer is yes, they are.
Or, at least, many types of bonds are.
Generally speaking, there are two types of bonds when it comes to if and how they are taxed: There are taxable bonds and tax-exempt bonds.
Whether or not they fall into one of these two categories will likely depend on the bond’s income that is accumulated by interest.
Types Of Bonds And How They Are Taxed
So, if some bonds are taxed, and others are not, which types of bonds that most people can get are taxed, and which ones aren’t?
The following is a short list of most of the types of bonds that an individual can make, and what their tax-exemption status is.
The most common types of bonds that you’ll find are corporate bonds, savings bonds, and treasury bonds.
Corporate Bonds
As the name suggests, this is a type of bond that is often issued by corporations as a way of raising finances for the rest of the company for any number of reasons.
The longest amount of time that a corporate bond is held is around a year or less and is often used as a way of managing debts for both parties.
When it comes to how these bonds are taxed, they are usually done so in three ways:
- Interest that is generated from the bond, which is usually paid every six months, can be taxed at both the federal and state level.
- Capital gains or losses that are made once the bond is sold.
- Profits gained through the original issue discount that applies.
The combined amount of money that is paid for each tax combines to make the total corporate bond tax.
When compared to other types of bonds, corporate bonds have some of the highest amounts of taxation applied to them.
However, the potential amount of profit made from these amounts is some of the highest out there.
Savings Bonds
Savings bonds are issued by a governmental body of some type, the US government being the issuer in the United States, unsurprisingly, and are used by the United States government as a way of covering the federal government’s bonding needs.
When compared to something like Corporate bonds, a savings bond is an incredibly safe form of a bond, one of the safest in fact, partly because it is backed by the credit of the United States government, and has full faith that the bond will be repaid.
In terms of how they are taxed, savings bonds are taxed at a federal level but are not subject to your local or state income tax.
However, if you have bought the bond from someone else who still claims to be the owner, then they will be taxed, not you.
Treasury/Government Bonds
This type of bond is a kind of debt obligation, usually issued by the national government, as a way to support the spending of the US government.
They are very similar to savings bonds, as they are often a very safe form of a bond, thanks to their being backed by the United States government.
As with savings bonds, treasury or government bonds are often taxed at the federal level, but not at the state or local level.
Final Thoughts
As you can see, when it comes to taxes and bonds, the answer will usually be yes.
Different types will have different rates, so make sure that you check before committing to one of these.
