Who Reports the Interest Income?
Interest earned on U.S. EE savings bonds must be reported by the bondholder when filing their tax return. This can be the owner of the bond, the co-owner, or the beneficiary. If the bond is registered in a minor’s name, the responsibility typically lies with the guardian or parent.
When to Report Interest Income
The interest on U.S. EE Savings Bonds can be reported in one of two ways: annually or at maturity/redeeming.
- Annually: Reporting the interest earned each year on your federal tax return.
- At Maturity/Redeeming: Reporting all the accrued interest when the bond reaches maturity or is cashed. This is the default method for most bondholders.
Tax Considerations
Deferred Taxation
Most bondholders opt for deferring tax until the bond’s maturity or when it’s redeemed. This method aligns with the concept of earning interest over a period rather than annually.
Tax Advantages
- Education Savings: Interest may be excluded from federal income tax if the bonds are used for qualified education expenses and meet eligibility requirements under the Education Savings Bond Program.
Examples
Example 1: Annually Reporting
John has a U.S. EE Savings Bond, and he decides to report the interest income each year. Suppose the bond earns $50 of interest in a year; John will include this $50 in his tax return for that year.
Example 2: Reporting at Maturity
Mary has a U.S. EE Savings Bond that she holds to maturity. The bond earns $500 in interest over its life. Mary will report the $500 as taxable interest income the year the bond matures.
Historical Context
Evolution of U.S. Savings Bonds Taxation
Introduced during World War II, EE savings bonds have been a reliable, low-risk means for Americans to save and invest. Their tax-deferred nature has made them particularly attractive for long-term financial planning.
Applicability
Individual vs. Institutional Holders
Individual bondholders report interest income according to the outlined methods. Institutions, such as trusts or estates, must report interest income for any bonds they hold.
Comparisons
U.S. EE vs. I Bonds
- U.S. EE Bonds: Fixed interest, tax deferment until redemption.
- I Bonds: Earn a composite rate combining fixed and inflation-adjusted rates, also tax-deferred.
Related Terms
- Interest Income: Earnings from investments like savings bonds.
- Deferred Interest: Interest that is accumulated but not paid out until a later date.
- Series I Bonds: U.S. Government savings bonds indexed for inflation.
FAQs
Can the interest be excluded from income tax?
What if I didn't report interest annually?
How can I switch from annual reporting to deferring until maturity?
References
- IRS Publication 550: “Investment Income and Expenses”
- IRS Form 8815: “Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989”
Summary
Understanding who reports U.S. EE savings bond interest and when it should be reported is crucial for accurate tax filing and potential tax benefits. Most bondholders opt for deferred reporting until maturity or redemption, but annual reporting is also an option. Proper reporting ensures compliance with IRS regulations and maximizes financial benefits.
