Tax-free California IOU interest

The good news for Californians is that your state now has a budget. Gov. Arnold Schwarzenegger signed the fiscal 2010 document yesterday.

The bad news is that having a budget in place doesn't necessarily mean that California will quit issuing IOUs.

These pieces of paper, officially known as registered warrants, started going out earlier this month to Golden State vendors and, yes, taxpayers who were due state tax refunds.

California Controller John Chiang and his staff now must crunch the numbers to make sure they really do have enough cash to pay people with real legal tender. That analysis is expected to take into at least next week.

Tax-free interest earned: But wait. There's some more potentially good news.

If you got an IOU and were able to hang onto it instead of cashing it in at the handful of banks who accepted them earlier this month, you will get a bit more cash. The IOUs earn an annual interest rate of 3.75 percent, more than most
brick-and-mortar financial institutions now offer on their savings
instruments.

And you won't owe taxes on that bit of extra money.

The IOU interest is treated like municipal bond earnings. That means, according to the Controller's IOU FAQ page, if you redeem the warrant within one year of its
maturity date, you will not have to pay state and federal income taxes
on any earned interest.

Of course, most people who got an IOU won't want to hang onto it any longer than they have to. When the IOUs were issued, they were done so with an Oct. 2 redemption date (printed on the documents). That's when you can present the document in person or send it by snail mail to the State Treasurer's Office in Sacramento.

Thanks to Robert Gremillion for the above image.
At his blog, you can find a larger image to print and share.

Earlier redemption possible: And one final bit of potentially good news. If the Controller determines that California has enough cash, it will pay off the IOUs earlier than the Oct. 2 redemption date.

Taxpayers, state vendors and other reluctant owners of the IOUs aren't alone in hoping for a quicker pay off.  As of Monday, California had issued 209,000 warrants worth $1.08 billion. The sooner the state can redeem them, the less interest it has to pay all those IOU holders.

Given the difficulty Golden State lawmakers had reaching a budget accord and the thin financial line the state is still walking, every cent counts.

Related posts:

• Californians, your tax IOUs are in the mail
• Using IOUs to pay California taxes, fees
• This is why I hate ballot referenda