Savings Bonds and gift tax

My father-in-law wants to make my wife co-owner of $60,000 in H bonds and send them to her. If she simply places them in a saftey deposit box, will she be liable for gift tax? If not can she just cash the gift tax exemption amout of $11,000 without paying taxes?

Tom’s response

Gift tax starts after you’ve given away $1 million. Moreover, gift tax is charged to the giver of a gift, not the receiver, so your wife isn’t going to owe any gift tax in any case. Click here for a link to the IRS publication on gift tax.

Note that there is a specific exception for gifts that he or she cannot actually possess, enjoy, or earn income from.

If your father-in-law makes your wife a co-owner, he will continue to be the owner and the interest will be paid to him. That would be interpreted to mean there’s no gift unless she cashes them.

You should also be concerned about income tax. H and HH bonds carry an amount of deferred interest that is printed on the front of the bond. If your wife takes advantage of her co-owner right to redeem the bonds, someone owes income tax on the deferred interest.

The IRS says it’s the person who put up the money to buy the bonds, but if your wife cashes them, her Social Security Number will be on the 1099-INT that reports the income to you and the IRS.

In this situation you’re required to make some unusual entries on your tax returns. My post Who pays the taxes explains this in detail.