When do Savings Bond taxes begin?
Tuesday, February 1st, 2005
Categorized as: Savings Bond taxes
I have some Series EE savings bonds that have reached initial maturity (12 years) but not final maturity (30 years). Do I now have to start paying taxes on the interest earned by the bonds?
Tom’s response
There are only two situations in which you are required to pay income tax on the interest earned by savings bonds. The first is when you redeem them.
The second is when your bonds reach final maturity and stop paying interest. The tax is due at that time whether you redeem them or not.
Of course there’s no reason not to redeem them at that point, but many investors aren’t paying attention and end up both losing interest and having to pay the IRS a penalty for not reporting the interest when it was due.
It is also possible to pay the tax year-by-year, but this isn’t required unless you’re an accrual-basis taxpayer, which is very unusual.
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Tom Adams
My mother-in-law (85 years old) has about $40k in series e bonds that will mature in early ’07. Is there anything that can be done to defer taxes?
Mike - no, there are no further deferral options.
The only tax strategy left to her is to cash half the bonds in 2006 and the other half in 2007 to split the income over two years.
The relative advantages depend on your mother-in-law’s federal income tax bracket. Those who plan even farther in advance can split the income over several years.
Will a penalty apply to bonds that matured in 2004 and were lost due to owner’s death. I just filed for lost bonds in 2007.
Ann - The IRS won’t take the loss of the bonds as an excuse for anything.
Assuming that by “matured” you mean that the bonds have stopped paying interest, the Treasury won’t replace them. It will just give you the money.
The question then becomes what tax year the Treasury puts on the 1099-INT reporting the interest to you and the IRS. If it puts 2004 you’re going to have to file an amended tax return.
But would it be your tax return or the final tax return of the owner of the bonds? That probably depends on what happened first, the bonds maturing or the owner’s death.
Your situation is more complicated than it appears.
Tom Adams