Who pays the taxes
Tuesday, January 31st, 2006
Categorized as: Savings Bond taxes
If a Savings Bond has the social security number of the owner but is cashed by the co-owner, who is responsible for the income taxes on the interest?
Tom's response
First, the social security number printed on the bond is only used for tracking purposes in case the bond is lost. It has no effect on taxes.
With E, EE, and I bonds, the 1099-INT tax form that reports income to the IRS will have the social security number of whoever cashes the bond. So if a co-owner cashes the bond, the co-owner will get the 1099-INT. (With H and HH bonds, however, the 1099-INT will have the SSN of the person who has been receiving the interest payments.)
Nonetheless, the IRS says the tax is owed by the person who put up the money for the Savings Bond. Here's the relevant text from IRS Publication 550, Interest and Investment Income.
Co-owners. If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond.
One co-owner's funds used. If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, since the other co-owner will receive a Form 1099-INT at the time of redemption, the other co-owner must provide you with another Form 1099-INT showing the amount of interest from the bond that is taxable to you. The co-owner who redeemed the bond is a nominee.
Nominee distributions. If you received a Form 1099-INT that includes an amount you received as a nominee for the real owner, report the full amount shown as interest on the Form 1099-INT on Part I, line 1 of Schedule 1 (Form 1040A) or Schedule B (Form 1040). Then, below a subtotal of all interest income listed, enter Nominee Distribution and the amount that actually belongs to someone else. Subtract that amount from the interest income subtotal. Enter the result on line 2 and also on line 8a of Form 1040A or 1040.
Both co-owners' funds used. If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid.
Community property. If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Publication 555, Community Property.
Child as only owner. Interest on U.S. savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year.
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I recently divorced and received a 1099 showing I have to pay taxes on $8,000 of interest on some bonds that transferred ownership as part of the marital settlement. I was wondering if I need to pay interest on bonds that had my ex-husbands name on the bond and an or listing my name after underneath. Which to me says we owned them jointly? Who should be paying the interest on these bonds? Can I delay paying the interest charge? P
Nancy - Except in community property states, it's possible to transfer ownership of Savings Bonds between spouses as part of a divorce without creating a taxable event.
Either you live in a community property state or the transfer was mishandled. I don't know if it's possible to go back and fix a mishandled transfer.
There's no way to delay adding the interest to your income.
Tom Adams
I recently discovered some savings bonds that were titled in my mothers name (Party A) and my grandmothers name (Party B). I believe my grandmother put up the money to purchase the bonds. The names are separated by the word "or" not "POD". Prior to discoving these bonds, my mother (Party A) passed away. However, my elderly grandmother (Party B) is still living… she's turning 101 in a couple of days! At any rate, I am thinking about removing my mothers name and reissuing (registering) the bonds to show my grandmother as the first owner, and my name (Party C) as the new co-owner. None of the bonds have fully matured. Is this reissue considered a taxable event? if yes, who pays the taxes? I know we have the option of cashing the bonds right now (in my grandmothers name), but I do not want my grandmother to take a large tax hit or have the nursing home assume her remaining assets. For all practial purposes, this is her money, but I would rather cash the bonds under my name and pay the taxes myself.
Please advise the best way to handle this situation.
Jim - The bonds legally belong to your grandmother. She can have the registration changed without tax consequences. There's more info on this kind of change here.
Unfortunately, as the above article points out, if you cash the bonds, the IRS would still say it's your grandmother who owes the taxes, not you.
Since her tax rate is almost certainly lower than yours, it's not clear to me why you want to pay the taxes anyhow.
Unless she needs the money, she also has the option of just not cashing the bonds. If she changes the registration as you've outlined, you would inherit them if she dies first.
If you don't change the registration, your grandmother's will determines who gets the bonds if she dies.
Tom Adams
I am now retired. While working I purchased Series EE bonds as gifts for my grandchildren and registered them in my grandchild's name and mine. I used my Social Security number as I did not have that information for my grandchild. My grandchildren are now coming of age where I am giving them the bonds on their 18th birthday or graduation from high school. How do I now get my grandchildren's SSN on the bonds so that interest earned is not part of my income?
Hi Ken - I assume you're saying that on each bond you are a co-owner with a grandchild.
From a tax perspective, it is a mistake to make yourself a co-owner of a bond meant as a gift. As the text at the top of this page explains, since you put up the money for the bonds, the IRS considers you the principal owner of the bonds, even though your name is listed second. And the IRS wants the principal owner to pay the tax.
On the other hand, as a practical matter, when the bonds are cashed, the 1099-INT reporting the interest to the IRS will have the SSN of the person cashing the bond. The SSN printed on the bond isn't used and there's no way to change it anyhow. The Treasury won't reissue a bond just to change the SSN.
There's a disconnect between how the IRS wants Savings Bonds interest handled in terms of principal owners and how the Treasury tells banks to make out the 1099s.
Tom Adams
Tom, my parents want to give me a 'E' savings bond issued in 1977 (now matured). They want to avoid any tax implications. The purchaser of the bond was my grandmother (maternal) who has been deceased for 2 years. The Bond has the name in the To: section as my grandmother along with her old address/city/state/zip. Underneath the address it states Or and my mothers name. Is there anyway that my parents/mother can give me the bond in order that they/she avoid any tax implication? If so how?Thank you
Hi Jerry - In short, no. Your mom has to pay the taxes. Since her tax rate is probably lower than yours anyhow, why not? But if it's higher, it's higher.
She will be tempted to hold on to it rather than tax it. This just compounds the problem, as now she's giving an interest-free loan to the government and the taxes still have to paid.
Tom Adams
I have a real quandry! Just got a phone call from a person who bought my grandparent's house who found Series E Bonds in the basement. Sure enough, there were 9 bonds with a total face value of $2600. My grandfather had bought them for my mother and didn't want his wife to know about them. They have "my mother's name" or "my grandfather's Name" on each of them. My grandfather died in 1981. My Grandmother died in 2004. And my mother died in 1995.
I'm my mother's sole survivor and was trustee of her living trust, which was liquidated and ended in 1996, with the help of an attorney. All federal taxes were filed for her year of death and for the trust. I'm sure that no taxes were paid on the bond interest.
What do I do about taxes and the IRS Penalty. The final maturity dates range from 1996 to 2005, with all but two having the 40 year maximum. The two bought in 1966 and 1957 had 30 year maturities. The interest for the 9 totals $16,379.12. Obviously, I learned that the bonds are well past their maturity dates. In spite of this, will the IRS still penalize me? Or can I file an estate form in my mother's name? It's value was well below any taxable estate amount.
Or will I have to pay the full tax plus penalty since my name and SS# will be on the W-9 filed through the bank?
Thanks so much for any advice you can give me.
Hi Dave - since the bonds aren't legally yours, it would be hard for the IRS to argue that you should have paid the taxes in earlier years. I don't see much chance of a penalty here.
Demonstrating to the Treasury that you're the legal heir could be the bigger problem, particularly on the bonds that have only your grandfather's name on them.
I suggest you use the links on this page to contact the Treasury and ask them how to proceed.
Tom Adams
my mother and father had a hand full of savings bonds my mother name was on some and fathers name were on some mother died in 1989 my father passed away in 1997 bonds were in his house in a box still in his house at the time of his death my father remarried 2 years after mother passed away in 1989 they are gone and have never been found the lady that he married took these bonds how would she have cashed these bonds if my mother and fathers name were on them? nothing in the will says that these were hers to take i have no searil numbers but these bonds were bought for me to go to collage on is there any way i can get my hands on them or find out if they have been cashed in
thank you mrs parnell
Tammi Lynn - since the bonds belonged to your father and he remarried, his wife would have a stronger claim to the bonds than his child would. Sorry, but that's how the law handles situations such as yours.
Tom Adams
I have a quick question….my parents bought my boys bonds with their names on them and my name as co owner…if I cash them will I pay the taxes on that? since my parents names were only on their to show where to mail it too….their names and social security numbers were not on there….
My husband at the time and I purchased series EE savings bonds by payroll deduction from my pay check. They are in my name "or" my former husband's name. In the divorce decree the bonds are listed as belonging to 'the child'. Based on what I've read here on this site, I'm thinking the answer to my question is that I claim the interest when cashed because they were purchased from my paycheck? Can they be transferred to my son's name? If they would have been in my son's name "or" my name, would the interest have been claimed by him and then offset by what he would be paying on a student loan?
Shannon - the 1099-INT tax form will be issued in the Social Security Number of the person who cashes the bonds - you or your son. Because they gave the bonds to you, your parents aren't responsible for the tax.
Sara - If you had changed the bonds to your son's name at the time of the divorce, you would have had to pay the tax at that time and he would pay the tax since then. If you change the name now, you pay all the tax, just as if you cashed them now. Since cashing is a lot easier than changing the name, I suggest you just do that.
Tom Adams
I and my wife buy EE savings bonds for our boys every so often. We plan on giving them these bonds when they complete high school. They have to use these bonds for educational purposes, tuition, books etc. Will I or him have to pay taxes on these bonds if we use them solely for educational expenses? Their name is on the Bonds and my name as the father is listed as a co-owner.
Also, since they will have a lower income as a student, will their tax bracket rate be less than mine?
Hi Terry - because of the way you've registered the bonds, these bonds aren't eligible for the Savings Bond college education tax deduction.
The 1099-INT will be issued in the SSN of whoever cashes the bonds (boy or father). Typically students are in a lower income tax bracket than their parents and would pay less (sometimes even nothing) in taxes.
Tom Adams
Mr. Adams,
How should a person register savings bonds in a way that the bonds can be eligible for the Savings Bond tax deduction?
Thank you for youe advise.
Terry - there are handful of rules about how the bonds have to be registered; they are described on my Savings Bond college education tax deduction page. If you need more information, please ask on that page, not here.
Tom Adams