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Ask the Expert: Bond interest and Medicare premium tax breaks

In a few years, my U.S. series EE savings bonds will mature. How will the bond interest affect my tax returns when I cash them in? Will my Medicare premiums go up? Will the interest affect my enhanced School Tax Relief (STAR) deduction?

Your bond interest will temporarily boost your federally taxable income. As a result, you may temporarily pay higher Medicare premiums and lose your enhanced STAR eligibility.

The interest on U.S. savings bonds is exempt from state and local taxes. But it's subject to federal tax, which can only be deferred until the bonds mature, are cashed or change ownership.

Every year, your Part B Medicare premium is based on the income reported on your federal tax return two years earlier. (In other words, your 2020 Medicare Part B premium is based on your 2018 income.) The standard 2020 Part B premium is $144.60 for individual taxpayers with income of $87,000 or less and married taxpayers filing jointly with income of $174,000 or less. Monthly premiums rise steeply for those with higher incomes, reaching $491.60 for individuals with income of $500,000 or more and couples with income of $750,000 or more.

The basic STAR exemption reduces school taxes on a primary residence for all homeowners with income of $500,000 or less. (Starting this year, people who currently receive a STAR exemption whose income is between $250,000 and $500,000 will receive a refundable credit instead of a reduction.) The enhanced STAR exemption, a bigger reduction, is available only to homeowners who are at least 65 and have income of $88,050 or less — and your STAR income eligibility is based on the income reported on your tax return two years earlier.

The bottom line

An increase in annual income can adversely affect income-based insurance premiums and tax breaks.

More information

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