Who pays the tax on a savings bond?

[Luvdogs]

My dad bought a lot of savings bonds for my kids, mostly $100 so a lot of bonds, not a lot of money.

I read that the person that buys them pays (he has been gone 10+ years) and another site says it is the recipient. But on some of the bonds it has my kids' names but my SSN. Some were bought before the kids even had a SSN.

One matures this year so that got me wondering-plus the resurrection of the I-bonds thread. BTW-tonight I input the serial numbers/issue date of about 100+ bonds and the current interest rate ranged from .77% (most of them-EE bonds) to 8.57% on a few Series I bonds that were bought around 2006.

 

[Sunset]

My DW bought many bonds a long time ago, and they are maturing now. I think they are EE bonds.
The interest rate was high in today's rate environment.

She goes to TreasuryDirect to see what the value of each is worth before going to the bank, as the bank made an error on cashing bonds that she caught, so we know they are not well trained there.

Wouldn't the treasuryDirect site have an FAQ about the taxation on the interest ? I don't see how a buyer can pay the taxes on interest that is not earned yet.

 

[RetiredAt55.5]

Not sure if applicable to the OP, but be careful cashing in EE bonds too early.

After 20 years, they will automatically double in value (if they haven't already), regardless if they had a crummy rate for the first 19 years.

I almost made that mistake myself.

To the OP's question, as long as the person receiving the bond proceeds is listed somewhere on the bond (either owner or co-owner), we never had a problem cashing them in. The SSN listed on the bond seemed irrelevant (we had lots of different combinations too, including deceased relatives). The bank we used would always use (record) the SSN of the person receiving the money, so they would be on the hook for the taxes the following year.

 

[GTFan]

And by double in value after 20 years, that means that you get the face value of the EE bond since all the older paper bonds were purchased at half the face value.

US bond interest is exempt from state taxes and you can use it to pay for education expenses tax-free. I used a decent amount of old EEs that way for the kids.

 

[SnowballCamper]

We got some bonds for DD when she was very young, in her name. The annual interest remains under the reporting threshold for her. This did require a bit of planning, but the treasury website talks about it here https://www.treasurydirect.gov/indiv/planning/plan_tax.htm

 

[JDARNELL]

So I have several I bonds that have a lot of deferred interest. There is a small fixed component to them also. I wonder if it makes sense to use them this year to pay for son’s college to not pay the marginal tax rate later on. I would still purchase bonds this year so I think the only trade off is forgoing the fixed component for the next 15 years but saving the taxes

 

[Sunset]

So I have several I bonds that have a lot of deferred interest. There is a small fixed component to them also. I wonder if it makes sense to use them this year to pay for son’s college to not pay the marginal tax rate later on. I would still purchase bonds this year so I think the only trade off is forgoing the fixed component for the next 15 years but saving the taxes

What is the fixed rate ?
I'm just going by the seat of my pants, but if it was 1% , and by paying the son's college means no tax paid on the bonds.
Then I'd pay the college.
Reasoning being, the tax saved on $xxx would be probably at the 12% rate, and 12% now of $xxx is worth more than earning an extra 1% on the $xxx (especially as you only will keep 0.82% of it in 15 yrs).

 

[GTFan]

Yep, I think the tax savings of using I-bonds for school is a no-brainer if you think you'll pay future taxes when cashing them out otherwise. The fixed interest on them isn't worth it if you can cash them tax-free.

 

[JDARNELL]

What is the fixed rate ?

I'm just going by the seat of my pants, but if it was 1% , and by paying the son's college means no tax paid on the bonds.

Then I'd pay the college.

Reasoning being, the tax saved on $xxx would be probably at the 12% rate, and 12% now of $xxx is worth more than earning an extra 1% on the $xxx (especially as you only will keep 0.82% of it in 15 yrs).

Fixed rates are between 1 and 2% with about 15 years left. I think your right when I did my back of the envelope calculation. Plus based on my projection when they all come due my tax rate will be marginally higher. Like many here the reality of it is with the 10k per person limitation on purchases isn’t going to change my life just some asset preservation for the next generation or gifting.