Series EE Bonds Taxation

[golftrek]

My mother has a safe-deposit box full of Series EE bonds bought back in 1985. She has never cashed any in or paid any tax on the bonds. They are earning a good interest rate. I understand that they will reach final maturity and cease earning interest in 2015. As I understand it, mother will owe federal tax (but not state tax) on the bonds in 2015. The way I read the IRS rules, mother will have to pay tax on the interest in 2015 whether or not she actually cashes in the bonds.

I have suggested that mother go ahead and redeem some of her bonds this year and the rest in 2015 so as to spread out the tax burden. Mother called me today and said that the person who does her taxes (he is not a CPA) said she will not have to pay the tax until she actually redeems the bonds even if this is after their final maturity date. He says she could just redeem a few of the bonds each year over the next 10 years or so and spread out the taxes.

Won't mother owe taxes on all the interest in 2015 even if she does not redeem the bonds? If she does not redeem the bonds in 2015, I assume she
will not get a 1099 but I think she will still owe the federal taxes. Of course, the bonds will stop earning interest after 2015. Mother does not need the income from the bonds at this time.

Any suggestions how to reduce or spread out the taxes? These bonds have earned a lot of interest over the years, so she is going to owe quite a bit of tax.

Thanks, Jo Ann

 

[rbmrtn]

I have a box full of savings bonds well maturing in the next few years. The tax is due in the year they mature or when redeemed. Not much you can do about it, there used be a rollover option to put the redeemed one into a new bond but that went away.

 

[GrayHare]

The tax on savings bond interest is supposed to be paid for the tax year in which the bonds reach final maturity. If not, and you redeem the bonds within 3 following years, you are supposed to file an amended return for the year of final maturity. If you wait past 3 years, the tax is paid during the year in which you redeem the bond.

Something rarely discussed: savings bonds offer a unique way to avoid/offset tax on the interest: if the bondholder dies, the bonds initially become property of the decedent's estate. If the estate's executor redeems bonds rather than distribute them to their beneficiary, the tax on the interest is due with the estate's regular income tax return (not with the decedent's final return). The estate typically has excess expenses (medical, funeral, legal, etc.) which are deductible against the income from redeeming the bonds, potentially offsetting all the interest and making the bonds, in effect, tax free.

 

[kaneohe]

The tax is due in the year they mature or when redeemed. ......................[/QUOTE

for the sake of completeness, perhaps the sentence should be clarified
(select one).........whichever comes (first/last)

 

[kaneohe]

The tax on savings bond interest is supposed to be paid for the tax year in which the bonds reach final maturity. If not, and you redeem the bonds within 3 following years, you are supposed to file an amended return for the year of final maturity. If you wait past 3 years, the tax is paid during the year in which you redeem the bond.

/QUOTE]

any consequences of paying the tax after maturity date?

 

[gromit]

I cashed some EE bonds earlier this year. I took them to my bank and they cashed them on the spot, and immediately handed me a 1099 receipt to use for filing taxes. To predetermine the exact value of the bonds, the Treasury has both a Savings Bond Wizard and a Savings Bond Online Calculator. Bond interest is only paid twice a year, so it is best to cash them right after a payment.

Individual - Savings Bond Wizard

Individual - Savings Bond Calculator

I think once a bond reaches final maturity it no longer earns interest and the taxes are due that year, whether you cash it or not.

 

[JakeBrake]

I'm sure the government is delighted by people who never cash their savings bonds. I know they won't come looking for you and encourage you to cash your bonds.

My late mother had several thousand dollars worth of POD (Pay On Death) bonds that my late father had bought while he was working. When I began to handle my mother's business after she was afflicted with dementia, the bonds had stopped earning interest.

When I first attempted to cash the bonds at my mother's bank, they said my POA (Power Of Attorney) was not good enough. I had to obtain a court ordered conservatorship before they would cash the bonds. This is an extremely conservative local bank and I'm not a member of the good old boy club. The bank gave me a 1099 for the total amount and I (my mother) paid tax on the total amount that year.

As for me, I hold 30 $500 bonds that I bought while I was working. You had to buy bonds to remain in good grace at MegaCorp. Those bonds are earning 1.19% to 3.70%. When the total reaches $15,000, I will probably cash depending on the interest they are earning at the time.

 

[golftrek]

Thanks for all the responses. The answers all agreed with what I told my mother. I will tell her again but she may ignore what I say. After all she is 82 and I am just 62, just a whippersnapper. The good news is she has earned good interest and will have a nice chunk of cash when she redeems them, the bad news is she will owe taxes.

Jo Ann

 

[JoeWras]

Just FYI for others who may be in similar circumstances (having paper bonds).

You can get them transferred to a "Converted Bond Account" at Treasury Direct. What's nice is that they can then be managed. You can check values or redeem. You can also "let them ride" and T.D. will redeem them at maturity regardless.

It is better than a safe deposit box.

I first had a lot of "graduation present" type bonds from the 70's that I put in T.D. I also obtained a bunch of paper bonds through a weekly deduction program at Megacorp #1 in the 80's and 90's. It was a small deduction amount, but still generated about 40 $100 or $200 bonds through the decade. It was just part of diversifying for me.

The graduation presents matured a while back. For my Megacorp deduction bonds, I'm letting them ride and they will start maturing and auto-redeeming in a few years. Since they are spread over the decade, the tax hit will be minimal.

 

[kaneohe]

Have you done the calculation comparing redeeming the bonds early vs at maturity? If redeeming them at maturity doesn't drive your mom into a higher tax bracket, you might be better off redeeming at maturity and keeping earning the good rates rather than splitting them into various yearss?

 

[GrayHare]

any consequences of paying the tax after maturity date?

Not in my experience. Probably the gov't doesn't mind people holding bonds past final maturity as it's an interest-free loan to them.

If you redeem at a bank a bond that's 1 to 3 years past final maturity, the bank may (or may not) issue you an 1099 for the year of final maturity, which would force you to file an amended return for that year.

 

[kaneohe]

Not in my experience. Probably the gov't doesn't mind people holding bonds past final maturity as it's an interest-free loan to them.

.

Interesting.......I would have guessed you'd be charged interest for paying late.
Still, aren't you punishing yourself if you don't redeem right away.....true Uncle does get his taxes but you lose out on whatever interest you might earn on the
"investable balance" = maturity value of bonds less tax due.

 

[golftrek]

Not in my experience. Probably the gov't doesn't mind people holding bonds past final maturity as it's an interest-free loan to them.

If you redeem at a bank a bond that's 1 to 3 years past final maturity, the bank may (or may not) issue you an 1099 for the year of final maturity, which would force you to file an amended return for that year.

Sooo are you saying that if mother waits several years to redeem (or, more likely I as her Executor redeem the bonds after her death), there would be no interest and penalties on the interest? We are talking about $100,000 plus in accumulated interest on the bonds so penalties and interest could be a large amount.

Jo Ann

 

[Dimsumkid]

Sooo are you saying that if mother waits several years to redeem (or, more likely I as her Executor redeem the bonds after her death), there would be no interest and penalties on the interest? We are talking about $100,000 plus in accumulated interest on the bonds so penalties and interest could be a large amount.

Jo Ann

There seems to be more rules for 100k+ accounts, I found this on Treasury Direct website "If an estate contains Treasury securities (including savings bonds) that total more than $100,000 in redemption value as of the date of death, the estate must be administered by a court."

It's hard enough having to administer someone's estate, I would suggest liquidating the bonds while she's still alive.

 

[GrayHare]

Sooo are you saying that if mother waits several years to redeem (or, more likely I as her Executor redeem the bonds after her death), there would be no interest and penalties on the interest? We are talking about $100,000 plus in accumulated interest on the bonds so penalties and interest could be a large amount.

Jo Ann

IMO it's unlikely you would see a penalty since you would not actually receive the interest until you redeem the bond. I redeemed a forgotten savings bond more than 10 years after final maturity, paid the tax for the year it was redeemed, and no one blinked an eye. Your dollar volume is larger than I've dealt with, so the possibility remains the IRS bothers to take issue only when more dollars are involved.

The Savings Bond Advisor site and book are the best I know on this topic. http://www.savings-bond-advisor.com/

 

[easysurfer]

This is good information. I have a bunch of EE bonds from back in the days of payroll deduction that start to mature in 2016. I too was under the impression that interest isn't due until cashed. My plan is to cash them when do anyhow, but nice to know the rules.

 

[GrayHare]

It's worth mentioning the reason savings bond interest is taxable to a decedent's estate or the bond's beneficiary is because, unlike most assets, the cost basis of savings bonds are not stepped up upon the death of the owner.

Another way to reduce or eliminate the tax hit is to transfer redeemed bonds into a child's 529 college savings plan. Certain income and time limitations apply, and the 529 beneficiary must be listed as the beneficiary of the bonds, which if necessary can be done by retitling them prior to redeeming them.

 

[youbet]

Great info GrayHare. Thanks.

I'm going to look into retitling some EE's to facilitate transferring the proceeds at redemption time into the grandkids's 529b accounts as you suggested. I was going to take the EE money at redemption time, pay the tax and then add what's left to the 529b's. Duh.............

Do you think the retitling will be considered a gift? Since I already gift them significant 529b bux every year, I might have to use some of the life time exemption.

 

[GrayHare]

Great info GrayHare. Thanks.

I'm going to look into retitling some EE's to facilitate transferring the proceeds at redemption time into the grandkids's 529b accounts as you suggested. I was going to take the EE money at redemption time, pay the tax and then add it to the 529b's. Duh.............

Note that one of the qualification requirements is the children are shown as your dependents on your income tax return. There are other hoops to jump through as well. This site has a summary http://www.fastweb.com/financial-ai...savings-bonds-into-a-529-college-savings-plan

 

[youbet]

Note that one of the qualification requirements is the children are shown as your dependents on your income tax return. There are other hoops to jump through as well. This site has a summary How Do I Roll Over US Savings Bonds into a 529 College Savings Plan? - Fastweb

Aw shuuuucks! That sounded too good to be true! Thanks for the article. I'll read it and see if I can figure out any possible way..........

Maybe retitle them to my son, hopefully making him responsible for the tax due, and then he xfers the money to the kids' 529b's and avoids the tax?

Having these EE's turn out to be tax free would be a happy day!

 

[GrayHare]

Aw shuuuucks! That sounded too good to be true! Thanks for the article. I'll read it and see if I can figure out any possible way..........

Maybe retitle them to my son, hopefully making him responsible for the tax due, and then he xfers the money to the kids' 529b's and avoids the tax?

Having these EE's turn out to be tax free would be a happy day!

That might work. I've been thinking of doing similar but haven't tried it yet. If I'm reading the regulations correctly, your son must have been at least age 24 when the bonds were initially issued.

 

[Dimsumkid]

That might work. I've been thinking of doing similar but haven't tried it yet. If I'm reading the regulations correctly, your son must have been at least age 24 when the bonds were initially issued.

I think you have it wrong, the parent must have been 24, not the child.

Also, if you were to transfer ownership in title to your child, this is a re-titling event, isn't it? You would trigger a taxable event on all interest up to the transfer date.