Savings Bonds and Taxes 101
April 9, 2017 3:02 PM   Subscribe

Super simple question. Let's say a relative bought you (made-up numbers!) $30k in savings bonds when you were a child. You cashed out the bonds as an adult for (again made-up numbers!) $45k in 2016. Do you owe taxes on the full $45k or just on the $15k interest? I know there a lots of nuances here. But before I ask my accountant more specific questions, I want to make sure I'm heading down the right path. And I can't seem to find a simple answer to this question online!
posted by whitewall to Work & Money (6 answers total) 2 users marked this as a favorite
From my research (dealing with similar situation), you only owe taxes on the interest. The IRS lets individuals "gift" other individuals a set amount (right now it's 14K), after which the taxes are (without special arrangement) the responsibility of the giver, not the recipient. So think of it this way: you were gifted whatever cash value of the bonds when you were born. If your benefactor really gifted you $30K in the same tax year, it was their responsibility to pay taxes on whatever was over the gift exemption. Now you possess bonds that accrue interest, and for those you either pay taxes on the yearly interest (which no one actually does), or you pay taxes all at once on the total interest when you redeem them.

Another way of thinking about this: there's no difference between your situation and being given $X in cash that your parents later invested on your behalf. If there were a difference, no one would buy savings bonds for other people!
posted by ayerarcturus at 3:18 PM on April 9, 2017 [2 favorites]

Oh, I should also mention that you needn't calculate the interest yourself -- your bank should generate a 1099-DIV that tells you how much interest you should report. Bring that to your accountant, and he or she should be able to do the rest.
posted by ayerarcturus at 3:22 PM on April 9, 2017 [1 favorite]

>If your benefactor really gifted you $30K in the same tax year, it was their responsibility to pay taxes on whatever was over the gift exemption

I just want to point out that a common misunderstanding with the gift tax here is that after a gifter goes over the 14k threshold for any one person the gifter is only required at that point to file a gift tax form that shows the excess going towards their lifetime exclusion of 5.45 million. Only after that lifetime exclusion is reached (again ignoring total gift amounts per person falling under the yearly gift threshold) are taxes owed by the gifter.
posted by Karaage at 3:16 AM on April 10, 2017 [3 favorites]

Well, root of my confusion solved. My bank double reported the interest earned on my 1099, making it almost equal to (but not exactly) the entire redeemed amount. Trying now to sort that out before Tax Day...

If anyone stumbles across this in the future, it's worth also explaining that EE savings bond are issued at 50 percent of face value, so in the example above, you'd actually have 30k of interest to pay tax on (the 45k redemption value less the 15k purchase price).
posted by whitewall at 9:56 AM on April 11, 2017

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