
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, February 14, 1994                   TAG: 9402110199
SECTION: BUSINESS                    PAGE: A8   EDITION: METRO 
SOURCE: MAG POFF
DATELINE:                                 LENGTH: Long

AVOIDING TAXATION ON EE BONDS GAIN

Q: I regularly give EE U.S. Savings Bonds to my grandchildren. I found an old newspaper clipping from the 1960s that said you could avoid taxation on the gain for EE U.S. Savings Bonds given to children. You have to file a special tax form just once to declare intent to pay tax on each year's gain. Then, when the children cash the bond, they don't have to pay tax. I called the Internal Revenue Service, which said it's still true. How does this work?

A: Larry Harding, U.S. Savings Bond coordinator, said the method to which you refer is possible. But it's so complicated that few people bother with it.

One of the advantages of EE bonds is that taxes on the gain are deferred until they are cashed. Even then, it's possible to postpone tax by rolling them into HH bonds which pay income. You would be taxed only on the monthly HH bond interest.

Anyone can, however, opt to pay taxes on each year's interest as he goes along. You can pay each year or, in the alternative, file one time stating your intention of doing this. In the latter case, you postpone paying the annual taxes until you cash in the bond. In other words, you are paying on an accrual basis instead of a deferred basis.

But if a child has no other income during those years - and not very much bond income - it is possible no tax would be due each year. That's because his or her income would be too low for taxation.

Harding said the bank cashing the bond would give you a 1099 form, showing taxes are due. It is up to you to prove to the contrary by making the necessary calculation of annual interest. Harding said most people simply choose to pay the tax rather than calculate this form for each year the bond was held.

If you follow this method, you must save the tax form that shows your intent to pay annually.

\ Reducing montly mortgage

Q: Through reading several articles, I have been led to think that if one pays enough extra (over the monthly required amount) on one's home mortgage, the accumulated over-payment could lower the principal, thus reducing the amount of monthly payment.

Having stretched and strained to accomplish this monthly overpayment to make one month's equivalent amount, I am informed that this payment must be in a large amount, such as $1,000. Now I am much disturbed that I will have to continue this rather large monthly outlay. As a widow in a condo, paying my mortgage and then on an additional condo, I believe I am living beyond my means.

A: Most mortgage companies are glad to accept any amount at all to be applied as an extra payment against the mortgage principal.

Michael Hincker, manager of Mortgage Service America in Roanoke, said the matter would be controlled by the note and deed of trust on your condo. Get out these papers and look at them. If they are silent on the subject of a minimum payment, you should be free to pay any extra amount.

What happened to the extra payments you have already made? Hincker said you should be certain the money was applied to reducing the principal.

Your basic understanding is in error, however. Paying extra money toward the principal will reduce the number of years for your mortgage to be paid off. It will never reduce the monthly payment. You can pay all the extra money you want, but the amount of the monthly payment will remain level until the final payoff.

The only way to reduce monthly payments is to refinance at a lower interest rate or for a longer period of time. You don't state your rate, but you should refinance if it's significantly higher than the current market rate.

If you are overextended, stop making the extra payments, because they will not help you reach that goal. Save and invest the extra money instead. \

Social Security and Civil Service

Q: I retired Jan. 3, 1983, with 25 years of service under the Civil Service system. As of January 1962, I had 32 quarters under Social Security. My birth date is Oct. 6, 1931, which would require 40 quarters to obtain benefits.

If I were self-employed for the additional eight quarters over the next two years, would any Social Security benefit be deducted from my Civil Service annuity?

I have asked this question at the Social Security office and have received two different answers, one being that it would reduce the annuity, and the other that it would not affect it in any way.

A: The answer, according to James Harris, assistant manager of the Social Security office in Roanoke:

If you qualified for Social Security by working eight more quarters, the amount of your Social Security benefit (not your Civil Service pension) would be reduced according to your income from Civil Service. You cannot collect full benefits under both.

Harris said the exact amount of the reduction would be based on a very complex formula.

Mag Poff covers banking and finance for the Roanoke Times & World-News. She will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.

by CNB