Tax-free Savings Bond interest income using gifts to charities
Sunday, March 20th, 2005
Categorized as: Savings Bonds as gifts and prizes • Savings Bond taxes
Is there any way to avoid paying taxes on Savings Bond interest - for example, signing them over to a relative, transferring them to a grandchild's education fund, or perhaps signing them over to a charity?
Tom's response
There is no legal way to avoid adding the income from your Savings Bond interest to your tax return. There are no rollovers, no sign-overs, and no do-overs.
However, although you always have to cash the bond and put the income on your return, you may be able to make an offsetting charitable deduction that will prevent you from actually paying taxes on the bond's income.
But proceed with caution - there are important limitations even to charitable deductions that can get you in trouble with the IRS. Complete details are in my book.
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What happens when a donor with matured savings bonds names a charity to receive them under his or her will? Whe the donor dies and the charity takes possession of the bonds, is the charity obligated to pay the tax on the interest that was earned when the bonds matured and were still in the hands of the donor? Is there any penalty the charity must pay on behalf of the donor? Can the estate take a charitable tax deduction for the maturity value of the bonds?
Carrie - the bonds can't be reissued to the charity so the charity can't cash the bonds.
In the situation you describe, the estate would have to cash the bond, pay the tax, and give what's left to the charity.
Tax rates for estates are much higher than tax rates for individuals, so it makes far more sense to take the charitable deduction while the individual is still alive.
Tom Adams