US Savings Bonds

If you are you looking for a way to invest, and gain a tax advantage at the same time, consider investing in savings bonds. They can be purchased for as little as twenty-five dollars, or in larger denominations if desired.

Savings bonds are a good investment choice, partly because income tax liability can be deferred until the year that the bond is cashed. You will not be required to pay income tax from the interest earned on a bond until the year that you cash the bond, which lets you determine the best time for the interest to be reported to the IRS. This type of reporting is called cash basis reporting. If you decide to report the accrued interest each year on your tax return, this is called accrual basis reporting. Once you start with this type of reporting, you must continue until the bond is cashed. You can decide with method of reporting will be best for you.

When you do redeem the bond, you may be in a lower tax bracket than you are now, so the amount of tax that you owe would be lower than if you were required to pay tax on the interest earned each year. If you purchase electronic bonds from the TreasuryDirect website one thing to note is that when the bond stops earning interest, the bonds are automatically redeemed and the accrued interest is reported for that tax year.

In some cases, you may be required to pay federal income tax early. These reportable events include:

• If a bond is reissued without the name of a living owner or principal co-owner.
• If a bond is reissued and the name of a surviving beneficiary does not appear on the reissued bond as the owner or co-owner.

In these events, the person that is giving up the ownership of the bond will be responsible for reporting the income tax. The IRS will send a form 1099-INT to the former owner of the bond.

So who must report the interest on a bond?

• If you purchase a bond in your name and another person is named a co-owner, you will be responsible for the tax since the bond is in your name.
• If you purchase a bond in the name of another person, for example as a gift, and that person is the sole owner, the person who’s name is on the bond will be responsible for the taxes.
• If you and another person purchase a bond as co-owners splitting the cost of the bond, both you and the person you purchased the bond with, the co-owner, are responsible for reporting the tax.

Savings bonds can be redeemed without penalty if the bond is at least 5 years old. If you redeem a bond that is less than 5 years old, you will lose three months of accrued interest.

To learn more about savings bonds and to calculate the current values and interest earned of your savings bonds, visit our free Savings Bond Calculator.