taxes

Beneficiary's tax responsibility for Series EE Savings Bonds

Judy O'ConnorDear Tax Talk,
Say the owner of a Series EE bond is deceased and the beneficiary of the EE bond is 18 or younger and a low-income college student. At the time of the 30-year bond's maturity, is the beneficiary responsible for paying tax on 30 years of interest, or only the tax from the original owner's date of death? Also, if the beneficiary is 18 or older, is that beneficiary taxed at his or her tax rate?
-- Marlene

Mother and daughter reading a book | Brainsil/E+/Getty Images

Brainsil/E+/Getty Images

Dear Marlene,
First of all, the interest on Series EE Savings Bonds is taxable and the original owner had 2 choices regarding when to report the interest. Generally, most people report all of the interest when the bond is cashed. If that is the case, then the beneficiary is responsible for reporting all of the interest on his or her return when the bond is redeemed and is taxed at his or her tax rate.

Alternatively, the original owner of the bond could have chosen to report the amount of interest earned each year. In that situation, the beneficiary needs to know how much interest was previously reported by the original owner to determine how much interest to report on his or her own return. The amount of the interest previously reported by the owner would not be included in the interest reported by the beneficiary.

I am glad to see that you have brought up the subject of a "younger, low income college student," as there is an important tax break you need to know about. "Qualified taxpayers" are allowed to exclude from their gross income all or a part of the interest paid when Series EE and I Bonds issued after 1989 are redeemed and the owner pays "qualified higher education expenses."

What are qualified higher education expenses?

Higher education expenses include tuition and fees paid for any course required as part of a degree or certificate program to a post-secondary institution that meets the standard for federal assistance, such as guaranteed student loan programs. You are not able to include the cost of books or room and board. Additionally, the expenses must be incurred in the year in which the bond is redeemed.

IRS Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, is used to calculate the excludable interest. My recommendation is that you take a good look at the form and instructions as there are limitations on how much income you can have and still exclude the interest, along with further details on all of the requirements needed for the exclusion.

Thanks for the great question and all the best to you!

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