EE savings bond interest

[Jud3]

This is the letter that i sent to the Treasury but have not heard back yet.  Please help.

                                                                                                                        February 26, 2022

To whom it may concern:

I hope you can follow this.

About 60 years ago, my father bought me (Joyce [PII removed]) 16 $50 Series E US Savings Bonds in 1963 & 1964 & 1965.  When I got married in 1975, my father told me about the bonds and, more importantly, that he could not find them.  I then applied to the US Treasury (in 1977) and they had a record of the original bonds!  The Treasury then re-issued the 16 bonds in my married name (Joyce [PII removed]).  When those 16 bonds matured in 2003 & 2004 & 2005 (they were 40 year bonds) we cashed them in.

Here is where it gets complicated.

When my father died in 1980, my brother (Warren) went through all of my fathers papers and kept the important ones in his home.  When my brother died in 2020, his son (my nephew) went through all of Warrens papers and found the 16 “missing” bonds (the ones issued in 1963 & 1964 & 1965) in the name of Joyce [PII removed].  He gave them to me and I cashed them in (July, 2021) because, of course, they had matured in 2003 & 2004 & 2005.  I received $6854.56 ($600 original cost plus $6254.56 interest).

In September, 2021, I received a letter from the Treasury saying that the bonds we had cashed in (in July, 2021) had been reported lost in 1977 and were replaced in 1977 and those were cashed in (in 2003 & 2004 & 2005).  That Treasury letter also DEMANDED that I pay back the $6854.56.  After investigating this a little more, I found that the Treasury was correct.  So, I paid back the entire $6854.56 in October, 2021.

Here’s the hooker!  This is income tax time, so the bank that we deal with dutifully sent us a 1099-INT form for 2021 showing that I received $6254.56 in interest for 2021.  Normally, I would declare that as interest income.  But, in this case we paid it back to the Treasury in October, 2021!  So, here is my question(s):

1. Should I just ignore the 1099-INT for 2021 and not declare that interest at all, or
2. My preference , somehow explain to the IRS in my 2021 1040 what happened.  How can I explain that to the IRS via a 1040?

This also affects my state income tax return.  What should I do?

Joyce [PII removed]

[AmyC · Accepted solution]

Since you received the income and paid it back in the same year, you will need to report both. Follow these steps:

1. Open your return
2. Go to federal income
3. Enter the 1099-int. 
4. continue to Tell us if any of these uncommon situations apply
5. Select I need to adjust the taxable amount
6. continue
7. Enter the full amount of interest paid back and select This savings bond interest was previously reported.
8. continue

[Jud3]

It worked.

Thank you.