savings bonds

Consider Tax Ramifications Before Converting Paper Savings Bonds To Electronic Format

Posted on September 7, 2017

There are potential tax ramifications to consider before ditching U.S. paper Savings Bonds and going digital.

As of January 2012, the Treasury Department eliminated the sale of paper U.S. Savings Bonds and moved to electronic only purchases. Uncle Sam began offering bond owners the option to convert their paper savings bonds to an electronic format, which requires opening an online Treasury Direct account.

While converting savings bonds from paper to electronic format may initially seem like a good idea for record keeping purposes, it may not be a smart financial decision.

When an electronic bond reaches final maturity, a 1099-INT will automatically be issued. The 1099-INT indicates the total amount of interest earned on a savings bond(s).

For individuals holding paper bonds, a 1099-INT will not automatically be issued. It is only issued when the (paper) bond is either cashed in, or the individual chooses to report the interest income.*

For the popular paper series EE savings bonds, the difference between the purchase price (half of the face value printed on the front of the bond) and the cash in value, is considered report-able interest income.

Additionally, paper bonds can be worth four to five times their face value at maturity. It can be a serendipity for investors to receive more money than they expected when cashing in their paper bonds. However, those same individuals are often unpleasantly surprised upon receiving a 1099-INT for all of the interest earned.

For many individuals the large amount of interest earned from matured bonds could be substantial and may result in needing to report more interest income than expected.

In certain cases, the interest income from savings bonds could adversely affect an individual’s tax bracket. By keeping the bonds in paper format, individuals can use a complimentary bond calculator to quickly determine cash in values and total interest earned amounts. With this financial information, paper bond investors can choose to systematically redeem bonds based on their financial goals. Once paper savings bonds are converted into an electronic format, the investor loses that option.

Futhermore, with electronic bonds, it is incumbent upon the investor to remember to log into their online Treasury Direct account, locate and print the 1099-INT form. For those that redeem paper bonds through their local financial institution (or mailed to the Treasury Department), a 1099-INT will be issued either on the spot or mailed to the individual in the first few months following the year the bonds were redeemed.

*IRS rules indicate that any interest earned over $10 on a savings bond(s) should be reported on ones federal income tax return in the year the bond(s) matures, regardless if the bond(s) has been redeemed. Most savings bond investor are not aware of this rule and do not report the interest until bonds are redeemed.

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