You do not have to make a special election on your tax return in order to defer the interest on Series EE or I savings bonds. You may simply postpone reporting the interest until the year you redeem the bond or the year in which it reaches final maturity, whichever is earlier. If you choose to defer the interest, you may decide in a later year to begin reporting the increase in redemption value each year as interest. You may also switch from annual reporting to the deferral method. These options are discussed in this section.
If you have deferred reporting of interest (the annual increases in redemption value) and want to change to annual reporting starting with your 2011 return, you must report on your 2011 return all interest accrued through 2011 on all your EE and I bonds. Then, starting in 2012, you report the interest accruing each year on all of your bonds, including bonds you acquired after the 2011 election. Suppose you do not change from the deferral method to the annual method on your 2011 return and later wish you had. If the due date of the return has passed, it is too late to make the election. You may not file an amended return for 2011 to report the accrued interest. You have to wait until next year’s return to make the election.
If you have been reporting annual increases in redemption value as interest income, you may change your method and elect to defer interest reporting until the bonds mature or are redeemed. You make the election by attaching a statement to your federal income tax return for the year of the change; see IRS Publication 550 for details.
How to report interest on a Series EE or I bond depends on how it was bought or issued:
Changing the form of registration of an I or EE bond may result in tax. Assume you use your own funds to purchase a bond issued in your name, payable on your death to your son. Later, at your request, a new bond is issued in your son’s name only. The increased value of the original bond up to the date it was redeemed and reissued in your son’s name is taxed to you as interest income.
As shown in the Examples below, certain changes in registration do not result in an immediate tax.
If you have been deferring interest on U.S. Savings Bonds, and then you transfer them to your spouse or ex-spouse as part of a divorce-related property settlement, you will be taxed on the interest deferred before the transfer date (6.7).
If you transfer U.S. Savings Bonds to a trust giving up all rights of ownership, you are taxed on the accumulated interest to date of transfer. If, however, you are considered to be the owner of the trust and the interest earned before and after the transfer is taxable to you, you may continue to defer reporting the interest.
Tax on the accumulated interest is not avoided by having the bonds reissued to a philanthropy. The IRS held that by having the bonds reissued in the philanthropy’s name, the owner realized taxable income on the accumulated bond interest.
If an owner does not report the bond interest annually and dies before redeeming the bond, the income tax liability on the interest accumulated during the deceased’s lifetime becomes the liability of the person who acquires the bond, unless an election is made to report the accrued interest in the decedent’s final income tax return (1.14). If the election is not made on the decedent’s final return, the new owner may choose to report the accumulated interest annually, or defer reporting it until the bond is redeemed or reaches final maturity, whichever is earlier. If the election is made on the decedent’s final return, the new owner is taxable only on interest earned after the date of death.
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