Dear Tax Talk,
My father has 28 Series EE savings bonds purchased in 1981 and 1982 that will be maturing (or stop earning interest) in the next few years. Is there any way he can convert or roll over these EE bonds to another investment vehicle to defer the interest income earned on the EE bonds?
The interest earned on your savings bonds is subject to federal income tax, which can be deferred until redemption, final maturity or other taxable disposition, whichever occurs first.
Generally, the interest earned is exempt from state income taxes. Special tax benefits are available to qualified owners of EE bonds under the Education Savings Bond Program. To be qualified, the bonds had to be issued after 1989 and be used for higher education expenses.
You have the choice of reporting interest earned on savings bonds in several ways. Whenever you report savings bonds interest, it should be included with other interest income on your federal income tax return.
- Cash basis reporting: Federal tax is deferred until the year of final maturity, redemption or other taxable disposition, whichever is earlier.
- Accrual basis reporting: You report interest annually each year as it accrues. Once you start, you must continue to report interest earned annually for all savings bonds and notes you own and any you may acquire. This may be advantageous for EE/E bonds in a child's name or for someone with little or no other taxable income.
Assuming your father has not used the accrual method for reporting bond interest, he should report the interest upon redemption. There is no other option available that would defer the accumulated interest.
The Series EE bonds are usually 30-year bonds. However, the bonds can be redeemed early without penalty at this point. By staggering the redemption of the bonds over several years, your father may be able to avoid a spike in income that will put him in a higher tax bracket. The benefit of the lower taxes may outweigh the benefit of continued investment.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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