Gifted EE Savings Bond with parent and child as co-owners. Who pays the tax on interest?

[JB7]

My son was gifted a sizeable number of EE Savings Bonds over the years, which we are now planning to cash in to help pay for his education.

Many of these bonds were issued in my name, with my son as the POD (beneficiary). I understand in this case I am the sole owner of the bonds and any interest from these bonds goes on my return. Likewise, there are a few where the son is the sole owner, so the interest from those goes on his return (if needed).

However, it is totally unclear how to treat other bonds we were gifted that list my son and I as co-owners (<Dad's name> OR <son's name>.) The Treasury Direct site mentions tax implications for co-owners, but not the case where neither of the co-owners paid for the bond. How should this interest be treated? Who's return does it go on?

[JB7]

Just to give one example of the misinformation I am finding, one law firm has a page on savings bonds. They stated "When a bond has a co-owner, the Treasury and the IRS assume that the first named owner is the principal owner, who is the person who will pay the income tax on the interest." OK, maybe I'll run with that. But two paragraphs later they say "When a bond is cashed, it is generally accepted that the individual cashing the savings bond is the individual responsible for the interest reporting on that year’s income tax return." This is contradictory info if the second named owner is the one cashing the bond.

It shocks me that this question isn't clearly answered already as EE bonds are quite popular as gifts for children. Why is something so simple as cashing a EE bond so darn complicated?

Edit - BTW the amounts of interest aren't huge, and I'm not that concerned about maxing out the education exclusion for savings bond interest. But I do want to avoid doing this "wrong" and throwing up red flags to the IRS.

[Anonymous]

It may not much matter.  You didn't mention your son's age, but you did mention something about college so I am going to go out on a limb that he's of traditional college age and under the age of 24. 

In that case, if it's on his return or yours, it will be taxed at the same rate since the unearned income of a "child", which includes most individuals with living parents up to age 24 will be taxed at the (presumably) higher rate of the parent.  

The IRS won't care much which of you claims it as long as someone claims it and pays the appropriate tax.  If he is 25 years of age or older, then I would report it on your tax return unless your son makes more money and is in a higher tax bracket.  The IRS will never complain if the decision you make gives them the benefit of the higher tax.  They are unlikely to compare two tax returns to see if they got the most money anyway, but their computers will look to see that the interest is reported somewhere. 

Sometimes you will find conflicting answers because no one really knows, or there is no single correct way to do something.   It would be nice if tax worked a little more like "this is the way", but it doesn't always.   It's not like engineering 🙂   

[JB7]

Thanks. I've looked in a few places and I've found no definitive answer. Unless I find out otherwise I'll probably just go with how the bank who cashed the bonds assigned the interest in their 1099s. (I'm not sure they did it right either, but that's a different discussion.)

[Anonymous]

That works!  Oddly, the IRS is pretty reasonable about many things and as long as you demonstrated that you used a "reasonable" method and exercised due care, you should be fine.  And again, if your son is under 25, the tax will be exactly the same either way, and who pays it is of little to no consequence.