Who pays the taxes
Tuesday, January 31st, 2006
Categorized as: Savings Bond taxes
If a Savings Bond has the social security number of the owner but is cashed by the co-owner, who is responsible for the income taxes on the interest?
First, the social security number printed on the bond is only used for tracking purposes in case the bond is lost. It has no effect on taxes.
With E, EE, and I bonds, the 1099-INT tax form that reports income to the IRS will have the social security number of whoever cashes the bond. So if a co-owner cashes the bond, the co-owner will get the 1099-INT. (With H and HH bonds, however, the 1099-INT will have the SSN of the person who has been receiving the interest payments.)
Nonetheless, the IRS says the tax is owed by the person who put up the money for the Savings Bond. Here’s the relevant text from IRS Publication 550, Interest and Investment Income.
Co-owners. If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond.
One co-owner’s funds used. If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, since the other co-owner will receive a Form 1099-INT at the time of redemption, the other co-owner must provide you with another Form 1099-INT showing the amount of interest from the bond that is taxable to you. The co-owner who redeemed the bond is a nominee.
Nominee distributions. If you received a Form 1099-INT that includes an amount you received as a nominee for the real owner, report the full amount shown as interest on the Form 1099-INT on Part I, line 1 of Schedule 1 (Form 1040A) or Schedule B (Form 1040). Then, below a subtotal of all interest income listed, enter Nominee Distribution and the amount that actually belongs to someone else. Subtract that amount from the interest income subtotal. Enter the result on line 2 and also on line 8a of Form 1040A or 1040.
Both co-owners’ funds used. If you and the other co-owner each contribute part of the bond’s purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid.
Community property. If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Publication 555, Community Property.
Child as only owner. Interest on U.S. savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year.