savings bonds

Reporting / Paying Taxes on Savings Bonds

Can you avoid paying taxes on Savings Bonds?

There are two important ways you can report the taxes from the interest earned on your US Savings Bonds. Please be sure to read which one is beneficial for you after reviewing it with your own personal tax accountant or tax attorney.

1. Cash Method

If you are like most bond owners, you will probably use the cash method of accounting to report interest income on savings bonds. That is, deferring the reporting of interest income until you cash in the bonds or they mature, and NOT reporting interest annually.

2. Accrual Method

If you use this method of accounting, you must report the interest on your bonds each year as it accrues.

Remember this important tip! Whenever you report savings bonds interest, it should be included with other interest income on your Federal income tax return. Knows Discussing Taxes is Boring but READ ON, You May Be Able To Avoid Paying Some Or All Taxes on Your Bonds

The difference between the purchase price of an E, EE or I bond, or savings notes, and the redemption value (amount you get when you cash them in) is considered interest income under the Internal Revenue Service Codes (IRS) codes. You will be responsible to report this income at some point - either by deferring it or reporting it annually. Normally, the bank, credit union or financial institution will issue a 1099 in the year the bond is redeemed. Tax Tip

IF you are in a lower tax bracket, you may want to be taxed on the interest income EACH YEAR as it accrues. IN SOME SITUATIONS, A VERY SMALL AMOUNT OF TAX OR NO TAX WILL BE DUE if the income is reported each year, depending on the value of the bonds. Always be sure to talk to your financial advisor before making any tax decisions.

Interest Accrual Definition

Series E, EE, or I savings bonds, or savings notes, DO NOT have interest paid on them either annually or semi-annually. Interest is added to the value of the bond and will be given to you only when the bond is cashed. The bond will increase in value as a result of interest being added to the value of the bond, referred to as interest accrual.

If you are using the cash method of reporting interest...

...according to IRS publication 17, you can report the interest in either of 2 ways:

Method 1: Postpone the interest until the year in which the E, EE, or I bonds, or savings notes, are cashed, disposed of or the year they mature.

Method 2: Choose to report the increase in redemption value as interest each year. Once you choose this method, you MUST report the interest every year.

If you want to change your reporting from Method 1 to Method 2, you can do it without permission from the IRS. In the year you change, (from deferral to annual reporting of interest), you must report all interest accrued to date and not previously reported for ALL your bonds.

Once you change from Method 1 to Method 2, you must continue to report interest every year, for all series E, EE and I bonds, or savings notes, you currently own, and for any additional bonds you obtain at a later date, unless you request permission to change back to method 1 (deferring). Beware, this procedure can be a headache! You must submit a statement that meets 6 requirements or complete IRS form 3115 and/or refer to IRS Publication 550- to change back to deferring the interest.


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