4.29 Deferring United States Savings Bond Interest

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.

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image Filing Tip
Form 1099-INT When Savings Bond Is Cashed
When you cash in an EE or I bond, you receive Form 1099-INT that lists as interest the difference between the amount received and the amount paid for the bond. The form may show more taxable interest than you are required to report because you have regularly reported the interest or a prior owner reported the interest. Report the full amount shown on Form 1099-INT on Schedule B if you file Form 1040 or Form 1040A, along with your other interest income. Enter a subtotal of the total interest and then, on a separate line, reduce the subtotal by the savings bond interest that was previously reported and identify the reduction as “Previously Reported U.S. Savings Bond Interest.” The interest is exempt from state and local taxes.
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Changing from deferral to annual reporting.

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.

Changing from annual reporting to deferral.

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.

Co-Owners.

How to report interest on a Series EE or I bond depends on how it was bought or issued:

1. You paid for the entire bond: Either you or the co-owner may redeem it. You are taxed on all the interest, even though the co-owner cashes the bond and you receive no proceeds. If the other co-owner does cash in the bond, he or she will receive a Form 1099-INT reporting the accumulated interest. However, since that interest is taxable to you, the co-owner should give you a nominee Form 1099-INT, as explained in the rules for joint accounts in 4.12.
2. You paid for only part of the bond: Either of you may redeem it. You are taxed on that part of the interest which is in proportion to your share of the purchase price. This is so even though you do not receive the proceeds.
3. You paid for part of the bond, and then had it reissued in another’s name. You pay tax only on the interest accrued while you held the bond. The new co-owner picks up his or her share of the interest accruing afterwards.
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image Caution
E Bonds No Longer Earn Interest
All E bonds have reached final maturity and no longer earn interest. E bonds issued in the year 1980—the last issue date for E bonds—ceased earning interest in 2010, 30 years from their issue date (30.14). All deferred interest is taxable in the year of final maturity.
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Changing the form of registration.

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.

EXAMPLES
1. Jones buys an EE bond and has it registered in his name and in the name of his son as co-owner. Jones has the bonds reissued solely in his own name; he is not required to report the accumulated interest at that time.
2. You and your spouse each contributed an equal amount toward the purchase of a $1,000 EE bond, which was issued to you as co-owners. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse’s name. Neither of you has to report the interest earned to the date of reissue. But if you bought the $1,000 bond entirely with your own funds, you report half the interest earned to the date of reissue.
3. You add another person’s name as co-owner to facilitate a transfer of the bond on death. The change in registration does not result in a tax.

Transfer to a spouse.

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).

Transfer to a trust.

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.

Transfer to a charity.

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.

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image Filing Tip
Deduction for Estate Tax Paid on Interest
Where an estate tax has been paid on bond interest accrued during the owner’s lifetime, the new bondholder may claim the estate tax as a miscellaneous itemized deduction in the year that he or she pays tax on the accumulated interest. The deduction is not subject to the 2% adjusted gross income floor (11.17).
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Transfer of savings bond at death.

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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