My grandmother purchased Series I Savings Bonds payable on death to my kids (her grandchildren). Now that she is deceased, we are considering redeeming the bonds and putting them into 529. How is the interest on the sale of bonds reported and will it be tax exempt?
Because a 529 isn’t a qualified higher education expense or other reason? This article explains it in plain language pretty well ... but the bonds were in the grandparent's name and willed to the grandkids and not the parents ... doubt you can change that now. https://www.savingforcollege.com/article/how-to-rollover-us-savings-bonds-into-a-529-plan
Also, do the kids claim the interest or us as parents? The person who cashed in the bonds pays the taxes on interest ... so it that is the kids then it goes on their return ... if the kids are minor dependents then it may be reported on the parent's return instead (not usually the better choice ... compute it both ways first).
I agree with Critter-3, these bonds are not eligible for a tax free/tax deferred rollover to a 529 plan because of the ownership rules*.
Since the bonds are now in the kids name, they will report the interest on their tax return. They will need to file if their income is more than $1100. If their only income is from interest (including savings bonds) and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on your return, using form 8814. Enter at Less common income / Child's income.
*Why (what's the technicality)? There are several. The child (the current bond owner) did not purchase the bond before age 24. The child is/was not the dependent of the grandparent, so even during the grandparent's lifetime, the bonds could not be cashed (tax free) to pay for the child's education or fund his 529 plan. A 529 contribution is normally a qualified higher education expense, for savings bond proceeds. But, in this case, it's the bonds that don't meet the rules.