Declaring Savings Bond interest annually

I have referred to your website many times and I just ordered your book. My 18-year-old son has series EE bonds that now approach 10k in value. I want to have him file a tax return this year to pay the accrued interest now and then begin paying it annually before he is in a higher tax bracket. He’s never filed a return before. How do I go about this?

Tom’s response

First, even if you use a tax advisor for your own returns, if you son has no other income, you can do this one yourself, as it’s not very complicated. However, for those whose children are under 18, also see this post about the “kiddie tax”.

Here’s a link to a blank copies of IRS Form 1040 and Schedules A & B. Ignore Schedule A, but you’ll need to use Schedule B if the interest income is over $1,500.

Just open the forms, fill them out, and send them in. It usually saves the family money to continue to claim your son as a dependent on your own return, which means he can’t claim himself, so don’t check box 6a on the 1040.

The IRS says you don’t need permission to change to reporting Savings Bond interest annually. You don’t even need to fill out a form. But you have to do it for all the Savings Bonds you own and you have to continue reporting this way each year from now on.

You’ll need to know the total amount of interest earned by the bonds from when they were issued through the end of the year. It’s also quite easy to fall into what my book calls the double-taxation trap when you do this - I recommend you get a copy and spend a weekend reading it.

On one of the blank lines of Schedule B, write Savings Bond interest through end of tax year (changing to Method 2) and then enter the total amount of interest earned to date. Next year you would drop the part about changing methods, and you would report only the interest earned next year.

If you ever decide to switch back to letting the interest defer, you need ask permission, but again permission to change is automatic. I’ve created a form that readers of my book can use to ask for this permission.

Since Savings Bond interest isn’t state-taxable, your son probably won’t even meet the minimum requirement for filing a state tax form, but you might want to check this out. Most states now offer online forms you can fill out and submit pretty easily. On the state tax, you’d include the interest in his income, then deduct it in the adjustments section related to federal interest income.