Savings Bonds and taxes FAQ

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1) SOCIAL SECURITY NUMBER ON BONDS RECEIVED AS GIFTS
2) EXCHANGING SERIES E OR EE BONDS FOR SERIES HH BONDS
3) TAX LIABILITY
4) REISSUING SAVINGS BONDS TO REMOVE A CO-OWNER
5) TAX DEFERRAL WHEN CASHING SAVINGS BONDS
6) TAXES WHEN SAVINGS BONDS ARE CASHED FOR EDUCATION

1) SOCIAL SECURITY NUMBER ON BONDS RECEIVED AS GIFTS

1.1) Our daughter received a Savings Bond as a gift. The person who gave the gift used his own Social Security Number to register the bond instead of our daughter's Social Security Number. Should we change the Social Security Number? If we don't change it, will the bond buyer be responsible for paying the taxes when we cash the bond?

It's not necessary to have the Savings Bond reissued to show your daughter's Social Security Number. When your daughter cashes the bond, she must then provide her Social Security Number for Federal income tax and interest reporting purposes. (Although the Social Security Number on Series EE and E Savings Bonds is used for record keeping purposes, it's a good idea to keep a list of bond serial numbers separate from the bonds so they can be easily replaced if they're lost or stolen.)

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2) EXCHANGING SERIES E OR EE BONDS FOR SERIES HH BONDS

2.1) I have some Series EE bonds that I'd like to exchange for Series HH bonds. How do I do this?

PLEASE NOTE: The Treasury Department will no longer issue HH/H bonds after August 2004. After August 31, 2004, you will no longer be able to reinvest your HH/H or exchange your EE/E bonds for HH bonds.

To exchange your Series EE bonds for Series HH bonds, you should:

Take your EE bonds to a financial institution where you have an account (if possible, the institution should also be one that redeems EE Savings Bonds).
Work with an officer or employee of that institution to complete an exchange application (PD F 3253), particularly the portion of the form that covers direct deposit of semiannual interest payments on the HH bonds. If the institution doesn't redeem EE bonds, it's a good idea for you to try completing the top part of the exchange application before you go to the bank.

Note: The Savings Bond Wizard and PD F 3600, Tables of Redemption Values, are useful in determining how much your bonds are worth and how much interest the bonds have earned.
As you complete the exchange application, sign the request for payment on the back of each bond.

The institution processes your EE and E bonds through the commercial check collection system (if the institution is one that ordinarily redeems Savings Bonds). Otherwise, the institution guarantees or certifies your signature on the back of each of your EE bonds and sends those unredeemed, uncashed EE bonds to a Federal Reserve Bank that processes Savings Bonds. In either event, the institution sends your completed and signed exchange application to a Federal Reserve Bank and ensures that any additional funds required in the transaction are remitted.

The total redemption value of the EE bonds being exchanged must be at least $500--the minimum HH bond denomination. EE bonds issued in or before January 2003 are eligible for exchange after they are atleast six months old, while EE bonds issued after January 2003 must be held for at least 12 months. Both EE bonds and E bonds are eligible up to one year from the month in which they reach final maturity and stop earning interest--30 years after issue for E bonds with December 1965 and later issue dates and for EE bonds; and, 40 years after issue for E bonds with issue dates older than December 1965.

2.2) What are the tax implications of redeeming a Series E bond and converting it to a Series HH bond?

PLEASE NOTE: The Treasury Department will no longer issue HH/H bonds after August 2004. After August 31, 2004, you will no longer be able to reinvest your HH/H or exchange your EE/E bonds for HH bonds.

If you exchange eligible Series E or EE bonds or savings notes for Series HH bonds, you can either:

include the accumulated ("accrued") E or EE bond or note interest on your Federal tax return for that year, OR
continue to postpone ("defer") doing so until you cash your HH bonds, you give up owning them, or your HH bonds stop earning interest--20 years after their issue date--whichever happens first.
(To be eligible for an exchange, EE bonds have to be at least 6 months old. EE/E bonds and savings notes are eligible for an exchange up to a year after the month in which they stop earning interest.)

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3) TAX LIABILITY

3.1) My 12-year old daughter and I are listed as co-owners on several bonds. I'd like to cash some of these bonds and make sure my daughter has the tax liability. Is this possible?

If an owner or CO-owner is a minor and not of sufficient competency and understanding to sign and make a request for payment, then a parent with whom the minor resides or to whom legal custody has been granted can request payment for the minor. A parent who cashes a bond for a minor or CO-owner must sign a request on the back of each bond as follows:

John A. Jones on behalf of John C. Jones

That parent must also include the following statement on the back of each bond:

"I certify that I am the parent of [name of minor] and the person with whom he/she resides [to whom legal custody has been granted]. He/She is [age] years old and is not of sufficient competency and understanding to make this request."

If a Savings Bond issued in the names of co-owners, such as you and your child, is cashed during the lifetime of both co-owners, the CO-owner who bought the bond is generally liable for the interest earned, regardless of which CO-owner cashed the bond. The following chart from IRS Publication 550 shows who pays Federal income tax on Savings Bond interest.

How Bond is Bought Who Must Pay Tax on Bond Interest

You use your funds to buy a bond in your name and the name of another person as co-owners. You.

You buy a bond in the name of another person, who is the sole owner of the bond. The person for whom you bought the bond.

You and another person buy a bond as co-owners, each contributing part of the purchase price. Both you and the other CO-owner, in proportion to the amount each paid for the bond.

You and your spouse, who live in a community property state, buy a bond that is community property. If you file separate returns, both you and your spouse generally pay tax on one-half.

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4) REISSUING SAVINGS BONDS TO REMOVE A CO-OWNER

4.1) My husband and I currently own several Savings Bonds that have both of our names on them in the following form: John Doe or Jane Doe. We'd like to change the registration of these bonds so only one name appears on the bond. Can we do this?

Series I bonds can only be reissued to eliminate the name of a living CO-owner if one or both the co-owners are involved in a divorce or an annulment of their marriage. You can use Form PD F 5387 for this purpose. Send the form and the bonds to the Federal Reserve Bank that provides Savings Bond services for your region. Please note the transaction could be a taxable event. See Tax Consequences of Reissuing I Bonds at www.savingbonds.gov for more information.

Series EE/E and Series HH/H bonds can be reissued to eliminate the name of a living CO-owner in this situation. The CO-owner whose name is being removed needs to complete and sign Form PD F 1938 in accordance with the instructions printed on the form. If the bonds are being reissued to do more than remove the name of the living CO-owner whose name is being removed, then both co-owners need to complete and sign the form. Send the form and the bonds to the Federal Reserve Bank that provides Savings Bond services for your region. Please note the transaction could be a taxable event. See Tax Consequences of Reissuing Savings Bonds for more information.

4.2) I'm a CO-owner on several Series EE/E Savings Bonds with my deceased father. I'd like to have some of these bonds reissued to make my brother the owner and his son the CO-owner Am I subject to taxes on these bonds if my name is removed?

Yes, you'd be required to include all the bonds' previously accumulated interest on your Federal tax return you file for the year in which the bonds are re-registered ("reissued") to your brother and his son. This is true unless you can establish that some or all of that interest had been previously (and properly) reported by your father or whomever filed his final IRS 1040 for the year he died. For more information, read about the tax consequences of reissuing Savings Bonds and the Savings Bonds section in IRS Publication 550, "Investment Income and Expenses." It may also be helpful to take a look at IRS Publication 559, "Survivors, Executors, and Administrators."

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5) TAX DEFERRAL WHEN CASHING SAVINGS BONDS

5.1) I've bought and saved several thousand dollars' worth of Savings Bonds over the years. I want to redeem all or some of the bonds and put the funds into an Individual Retirement Account (IRA) so I can continue to defer interest. Is there a way to do this without having to pay tax on the interest earned when I redeem them?

No, there's no way to do what you described without your having to include as income on your Federal tax return the Savings Bond interest earned. By continuing to hold the bonds, you can continue to postpone reporting the bonds' accumulated interest for Federal income tax purposes until they stop earning interest, or you can exchange at least $500 worth of them for HH bonds. EE bonds and E bonds with December 1965 and later issue dates stop earning interest 30 years after issue. E bonds with November 1965 and earlier issue dates stop earning interest 40 years after issue. For HH bonds, the interest earning life span is composed of two 10-year segments, for a total of 20 years. You have up to a year following the month in which an E or EE bond or savings note stops earning interest to include it in an exchange of at least $500 worth of EE/E bonds and notes for HH bonds.

For more information, read IRS Publication 550, "Investment Income and Expenses," and IRS Publication 590, "Individual Retirement Arrangements (IRAs)."

5.2) Is there any way to defer the taxes when cashing Savings Bonds to buy a home?

No; however, you may find it helpful to read IRS Publication 550, "Investment Income and Expenses," and IRS Publication 530, "Tax Information for First-Time Homeowners."

5.3) I'm not sure how I should go about reporting Savings Bond interest for my taxes. Can you tell me what my options are?

If you own Series I, Series EE, or Series E bonds and use the cash method of reporting, you can:

Postpone reporting the interest on your Federal income tax return until the year you cash the bonds, the year you give up owning them, or the year in which they finally mature (stop earning interest), whichever happens first; OR
Choose to report the bonds' increases in value as interest each year.

(Note: Under the cash method of accounting, you report your income for the year you actually receive it.)

If you want to change your method of reporting Savings Bond interest from the first to the second method (outlined above), you can do so without notifying or getting permission from IRS. However, when filing your Federal income tax return for the year you change, you must include on that return all your bonds' interest accumulated to date that hasn't previously been reported.

If you want to change your method of reporting Savings Bond interest from the second to the first method (outlined above), you can do so by filing IRS Form 3115 with IRS and following the procedures in the Savings Bonds section in IRS Publication 550, "Investment Income and Expenses."

If you need help figuring out how much Savings Bond interest to include on your return under the second method mentioned above (reporting increases in value each year), get PD F 3501 mailed to you through our forms ordering system.

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6) TAXES WHEN SAVINGS BONDS ARE CASHED FOR EDUCATION

6.1) I'd like some general information about tax exemption when cashing bonds for education. Where can I get this information?

Try the following sources of information about the education feature of Savings Bonds:

You can find information on our site about the education feature in Savings Bonds for Education on the Savings Bonds Website.
You can find helpful information in the Savings Bonds section in IRS Publication 550, "Investment Income and Expenses," and on IRS Form 8815 and IRS Form 8818.
You can also see the education benefits FAQ on this site.

6.2) If Savings Bonds are used to pay for college tuition, are they tax exempt? If so, what requirements must be met and what forms are necessary to claim exemption?

Under the Educational Savings Bond Program, interest earned on Series EE and Series I bonds bought on or after January 1, 1990 may qualify for exclusion from income for Federal income tax purposes if the bond owner pays tuition and required fees at colleges and universities during the year the bonds are redeemed. To qualify for this exclusion, tuition or other educational expenses must be incurred by the taxpayer, his or her spouse, or his or her dependents. In addition, there are income and other limitations. Bonds intended for the education of a dependent child must be issued in the name(s) of the taxpayer(s) for whom the child is a dependent. The dependent child can't be named as owner or CO-owner; however, the dependent may be named as beneficiary on the bonds.

To obtain the necessary documentation and specific information, request the following from the Internal Revenue Service: IRS Publication 550, IRS Form 8815, and IRS Form 8818.

6.3) When I bought Savings Bonds for my children's education, I was confused about how they should be registered to qualify for the education tax exclusion -- I mistakenly registered them in my children's names instead of my own. Can I get the name on these bonds changed so they qualify for the tax exclusion?

As long as the bonds are Series I or Series EE and issued January 1990 or later, you can request that they be "reissued" to correct the registration. To do this, complete and sign Form PD F 5387 (for Series I bonds) or PD F 4000 (for Series EE bonds). Your signature on the form should be guaranteed or certified by an authorized certifying officer (available at a bank, trust company, or credit union). Mail the completed form, along with the bonds, to the Federal Reserve Bank that handles Savings Bond transactions for your region.

6.4) I'm a U.S. citizen, but I live in Europe. If my child attends a university in Europe, I'd still like to use Savings Bonds I've bought for his educational expenses. How do I find out which schools qualify for this program?

IRS Publication 550, "Investment Income and Expenses," states that eligible "institutions include most public and nonprofit universities and colleges and certain vocational schools that are eligible for federal assistance." This seems to exclude European universities and colleges since they would be very unlikely to receive direct financial assistance from the U.S. government.

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Keep in mind that these questions may not fit all situations and are only intended as guidelines. Please visit the Savings Bonds website at www.savingsbonds.gov, or see your organization's Savings Bonds contact if you have any questions

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