Tax-free Savings Bond interest income using gifts to charities

Sunday, March 20th, 2005
Categorized as: Savings Bond taxesSavings Bonds as gifts and prizes

Is there any way to avoid paying taxes on Savings Bond interest – for example, signing them over to a relative, transferring them to a grandchild’s education fund, or perhaps signing them over to a charity?

Tom’s response

There is no legal way to avoid adding the income from your Savings Bond interest to your tax return. There are no rollovers, no sign-overs, and no do-overs.

However, although you always have to cash the bond and put the income on your return, you may be able to make an offsetting charitable deduction that will prevent you from actually paying taxes on the bond’s income.

But proceed with caution – there are important limitations even to charitable deductions that can get you in trouble with the IRS. Complete details are in my book.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

5 Comments

On March 1st, 2010 Carrie said:

What happens when a donor with matured savings bonds names a charity to receive them under his or her will? Whe the donor dies and the charity takes possession of the bonds, is the charity obligated to pay the tax on the interest that was earned when the bonds matured and were still in the hands of the donor? Is there any penalty the charity must pay on behalf of the donor? Can the estate take a charitable tax deduction for the maturity value of the bonds?

On March 2nd, 2010 Tom Adams said:

Carrie – the bonds can’t be reissued to the charity so the charity can’t cash the bonds.

In the situation you describe, the estate would have to cash the bond, pay the tax, and give what’s left to the charity.

Tax rates for estates are much higher than tax rates for individuals, so it makes far more sense to take the charitable deduction while the individual is still alive.

Tom Adams

On March 18th, 2010 Tom Adams said:

I just found this article on Transferring U.S. Savings Bonds to Charities. It discusses how an estate can make the transfer and avoid both income and estate taxes, but there has to be an instruction in your will to do so.

Tom Adams

On March 18th, 2010 curtis little said:

I have approx $100,000 in EE bonds. Is there any
legal way that I can use them to off set my grand-
sons college education???

On March 19th, 2010 Tom Adams said:

Curtis – You should cash the bonds, hold back what you need for taxes, and spend the rest on your grandchild’s education.

If you’re asking whether there’s a way to avoid paying the income tax in this situation, the answer is no, there’s not.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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