4.28 Interest on United States Savings Bonds

Savings Bond Tables: The e-Supplement at www.jklasser.com will contain redemption tables showing the 2012 year-end values of Series EE bonds and Series I bonds.

EE Bonds.

Series EE bonds may be cashed for what you paid for them plus an increase in their value over their 30-year maturity period. See the discussion of the interest accrual and redemption rules for U.S. Savings Bonds (30.14).

The increase in redemption value is taxable as interest, but you do not have to report the increase in value each year on your federal return. You may defer (4.29) the interest income until the year in which you cash the bond or the year in which the bond finally matures, whichever is earlier. But if you want, you may report the annual increase by merely including it on your tax return. If you use the accrual method of reporting, you must include the interest each year as it accrues. Savings bond interest is not subject to state or local taxes.

If you initially choose to defer the reporting of interest and later want to switch to annual reporting, you may do so. You may also change from the annual reporting method to the deferral method. See 4.29 for rules on changing reporting methods.

Series I bonds.

“I bonds” are inflation-indexed bonds issued at face amount (30.15). As with EE bonds, you may defer the interest income (the increase in redemption value each year is interest) until the year in which the bond is redeemed or matures in 30 years, whichever is earlier (4.29).

Education funding.

If you buy EE or I bonds to pay for educational expenses and you defer the reporting of interest (4.29), you may be able to exclude the accumulated interest from income when you redeem the bonds (33.4).

Bonds registered in name of child.

Interest on U.S. savings bonds bought for and registered in the name of a child will be taxed to the child, even if the parent paid for the bonds and is named as beneficiary. Unless an election is made to report the increases in redemption value annually, the accumulated interest will be taxable to the child in the year he or she redeems the bond, or if earlier, when the bond finally matures. The kiddie tax (24.2) may apply to a portion of the annually reported interest or to interest on redeemed bonds. For example, if a child under age 18 has 2011 investment income over $1,900, the excess is taxed at the parent’s top tax rate on the child’s 2011 return (24.2). To avoid kiddie tax, savings bond interest may be deferred (4.29).

Bonds must be reissued to make gift.

Assume you have bought I or EE bonds and had them registered in joint names of yourself and your daughter. The law of your state provides that jointly owned property may be transferred to a co-owner by delivery or possession. You deliver the bonds to your daughter and tell her they now belong to her alone. According to Treasury regulations, this is not a valid gift of the bonds. The bonds must be surrendered and reissued in your daughter’s name. For the year of reissue, you must include in your income all of the interest earned on the bonds other than interest you previously reported.

Planning Reminder

Election for Children Not Subject to Kiddie Tax

If your child has net investment income under the annual threshold ($1,900 for 2012) for the kiddie tax (24.2), making the election to report the interest annually may be advisable. For example, a dependent child is not allowed to claim a personal exemption, but he or she may claim a standard deduction for 2012 of at least $950 (13.5). If the election to report the savings bond interest currently was made for 2012, up to $950 of the interest would be offset by the standard deduction, assuming the child had no other income.

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If you do not have the bonds reissued and you die, the bonds are taxable to your estate. Ownership of the bonds is a matter of contract between the United States and the bond purchaser. The bonds are nontransferable. A valid gift cannot be accomplished by manual delivery to a donee unless the bonds also are surrendered and registered in the donee’s name in accordance with Treasury regulations.

Series E bonds.

There are no Series E bonds still earning interest. The last E bonds, those issued in June 1980, reached final maturity in June 2010, 30 years from the date of issue.

Series HH.

These bonds were available after 1979 and before September 1, 2004, in exchange for E or EE bonds, or for Freedom Shares. They were issued at face value and pay semiannual interest that is taxable when received. They mature in 20 years.

Series H.

These bonds were available before 1980 and they reached final maturity 30 years later. If you obtained Series H bonds in an exchange for Series E bonds, and you did not report the E bond interest annually, the accumulated interest on the E bonds became taxable when the H bonds were redeemed or, if earlier, when the H bonds reached final maturity 30 years from issue.