Interest on savings bonds

[KKane]

In 2016 I redeemed (fully matured) Series EE Savings Bonds that were originally purchased in 1986. Both my and my daughter's names were on the bonds.

I'd like to know if there is any way to avoid including the interest income on my 2016 Federal return. (For example, would depositing the money into a 529 in her name help?)

[LindaBelmont · Accepted solution]

The only possible way to save taxes might be if you used the proceeds to pay for higher education. And then, the bonds would have to been in your name and not your daughters name.  Turbo tax will ask about this possible deduction after you enter the interest.

You asked about a 529 - There is no federal deduction for 529 contributions so that would not help lessen the federal tax burden.

I am assuming that you did not report the savings bond interest yearly. This is a technique where you report each year the amount of interest the bonds earned that year and pay the federal tax yearly.  If  you did this, you can adjust the amount of interest reported on this years return.

[KKane]

Linda, thanks for your response.

No, we didn't report the accrued interest each year.

IRS Publication 17 talks about an Education Savings Bond Program that allows you to use the proceeds from savings bonds to pay higher education expenses (and, I've been told, to fund a 529), thereby avoiding paying taxes on the accrued interest).

I believe it only applies to bonds purchased after 1989, so it wouldn't be allowed for these (but could be for later others we hold).

Are you (or anyone else) familiar with this or other ways to appropriate the funds from a savings bond redemption to remove any tax liability?

Thanks,
Ken

[LindaBelmont]

Hi,

Yes you can fund a 529 using qualified savings bonds.  However, the bonds must be in the parent' name (not the daughters) so if your daughter's name is on the bonds, they are not qualified bonds

From the IRS  <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p970/ch10.html">https://www.irs.gov/publications/p970/ch10.html</a>
See near the end (I marked it with <<<<<)

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 $92,550 ($146,300 if married filing jointly).

•Your filing status isn't 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.