E Savings Bond Redemption & Consequences

[Aleta]

I have a dilemma. I gave 2 savings bonds to my son at the end of last year which are in his name but also has me as the (OR) other person listed below his information and my social security number. They final maturity was in October and December of 2006.

I found out last week that he didn't cash them in last year, due to alot of things going on in his own life, not to mention a difficulty of his wife's pregnancy and subsequent birth of their first child.

He brought them over to me yesterday and suggested that I cash them in and buy a new bond for his daughter. Somehow, I've heard that you can give bonds to a grandchild to be used later for education. Anyways, I went online and saw information that said that the interest earned on them at maturity should have been reported in the year that they matured and that it could cause a problem for the person cashing them in.

I went to my bank today and the manager input the information and it showed the redemption but no other actions. I'm wondering if the actions only occur after they are cashed out.

I don't want to have our friends up there at the treasury coming back on me saying that I owe penalties or whatever.

Is there anyone here that has any kind of information on this or a reputable website that could get me the informaiton that I need? Really appreciate any input that others may have.

[kv968]

The bank should issue you a 1099-INT when you cash them in. Since you didn't redeem the bond at maturity, I would imagine they would just do it when you cash it in. Maybe this site will help:

E Bonds

[Aleta]

Ky968: Thank you for your input. I had already gone to that site. I think after reading it again that that could be a problem if you have an electronic E Bond. According to what they say, that after the bond reaches maturity, that it is redeemed by the site and turned in to the IRS for that year. They really don't give enough information about paper bonds which is what this is. I'll go tomorrow and try it. Again thank you.

[kv968]

Sorry that didn't help. It is kind of unclear. Reading this from the site:

"Cash Basis Reporting-federal tax is deferred until the year of final maturity, redemption, or other taxable disposition, whichever is earlier. "

It seems like the taxes should have been paid when it matured.

However when reading this from IRS Publication 550:

"Series EE and series I bonds. Interest on these bonds is payable when you redeem the bonds. The difference between the purchase price and the redemption value is taxable interest."

The interest is payable when you redeem the bonds, leaving me to believe that since you didn't redeem then and get the interest yet, no taxes are due.

Very confusing indeed, but that's our government I'm sure others here have encountered the same dilemma and will chime in. IMO, if you didn't cash them in and didn't receive a 1099-INT from the issuing institution, you don't owe anything yet. But that's just me. Good luck.

[Aleta]

I agree with the wording. It is almost contradictory. I can just try cashing them in tomorrow. My idea was to put them in my granddaughters name for education, but now I'm reading that you should put the bonds into the parents name with the childs name on the bottom as or. It's all a little confusing.

Also, this is a series E Bond. That might be a difference and it's a paper bond, not an electronic bond.

[kv968]

Let us know how it works out.

[Like2Plan]

I agree with the wording. It is almost contradictory. I can just try cashing them in tomorrow. My idea was to put them in my granddaughters name for education, but now I'm reading that you should put the bonds into the parents name with the childs name on the bottom as or. It's all a little confusing.

Also, this is a series E Bond. That might be a difference and it's a paper bond, not an electronic bond.

Aleta,
In order to qualify for the tax free interest (if the money is used for education) there are several tests.

Who Can Cash In Bonds Tax Free
You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions.
* You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.
* Your modified adjusted gross income (MAGI) is less than $78,100 ($124,700 if filing a joint return).
* Your filing status is not married filing separately.
Qualified U.S. savings bonds. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners).

The owner must be at least 24 years old before the bond's issue date. The issue date is printed on the front of the savings bond.

link to IRS pub 970

Keep in mind that the income test is really 18 years or so later--it is possible in that amount of time that your DS may be making more than the limit--then the earnings are taxed at your DS's rate even if the money is used for qualified college expenses for your granddaughter.

The other thing to consider is that series EE bonds are paying a fixed rate of interest and it is not a very good rate ( Current Rate: 3.40% through October 2007 (fixed rate).

I don't know how much money you have to invest for your granddaughter, but would it be worthwhile for you to establish a 529 account for her? You are not tied to any one state's plan--your state or another if you like the investment options better.