Who pays tax on Savings Bonds with joint owners

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Who pays tax on Savings Bonds with joint owners

Postby rickwmm » Sun Feb 10, 2013 4:32 pm

My mother died around 20 years ago and left approximately $15000 to my son, who was only around five years old at the time. My wife and I used the inheritance money to purchase savings bonds for him. Because of his age, we purchased the bond in both my name and my son as co-owners. On the bond, my name is listed first, and then my son's name as co-owner. For reasons which I don't remember now, we put my social security number on the bond. My wife was actually the person who purchased the bonds at the bank. We have never paid any tax on these bonds, which will reach their final maturity in about ten years. My son now has the bonds and will eventually cash them in. The question is...from the IRS perspective, who pays the tax on them? According to what I've read, the IRS says that when a bond is issued in two people's names as co-owners, the person who provided the funds has to pay the tax. In this case, the funds essentially came from my mother's estate from money specifically earmarked for my son, so that would seem to mean he should pay the tax. But since my social security number is on the bonds and since my wife was actually the person who purchased the bonds, I'm wondering if the IRS would think my wife and I (we file a joint return) should pay the tax?
rickwmm
 
Posts: 10
Joined: Sun Feb 10, 2013 4:29 pm

Re: Who pays tax on Savings Bonds with joint owners

Postby user5027 » Sun Feb 10, 2013 8:24 pm

We had a similar situation. When your son cashes the bonds, you will receive a 1099 for the interest and will need to report it on your 1040. You are a "nominee" for your son. You can avoid having to include the interest as your income by issuing a 1099 to your son (copy to IRS) transferring the interest and then he reports it as his income. As I recall you still report interest but indicate it is as a "nominee" and do not include it as part of your income.

See fifth paragraph...
http://www.irs.gov/taxtopics/tc403.html
user5027
 
Posts: 295
Joined: Sat Jun 16, 2012 9:54 pm

Re: Who pays tax on Savings Bonds with joint owners

Postby crowd79 » Sun Feb 10, 2013 9:53 pm

This is an excellent question and got me pulling out my EE Bond issued to me & purchased by my father in 1986. It still pays interest at 4% for another 4 years. My SSN is on the bond and it has my name listed first, then my old home address below that, at the time (when I was living with my parents), and my fathers name listed after "or" below the address. If I were to cash it out today, would I receive a 1099 INT or my father?
crowd79
 
Posts: 632
Joined: Sun Nov 18, 2012 11:37 pm

Re: Who pays tax on Savings Bonds with joint owners

Postby sscritic » Mon Feb 11, 2013 5:33 pm

I no longer look things up for other people, but I do like to find answers to questions that interest me. From what I have found, you have not received a correct answer yet.
sscritic
 
Posts: 21858
Joined: Thu Sep 06, 2007 9:36 am

Re: Who pays tax on Savings Bonds with joint owners

Postby Mel Lindauer » Mon Feb 11, 2013 5:38 pm

rickwmm wrote:My mother died around 20 years ago and left approximately $15000 to my son, who was only around five years old at the time. My wife and I used the inheritance money to purchase savings bonds for him. Because of his age, we purchased the bond in both my name and my son as co-owners. On the bond, my name is listed first, and then my son's name as co-owner. For reasons which I don't remember now, we put my social security number on the bond. My wife was actually the person who purchased the bonds at the bank. We have never paid any tax on these bonds, which will reach their final maturity in about ten years. My son now has the bonds and will eventually cash them in. The question is...from the IRS perspective, who pays the tax on them? According to what I've read, the IRS says that when a bond is issued in two people's names as co-owners, the person who provided the funds has to pay the tax. In this case, the funds essentially came from my mother's estate from money specifically earmarked for my son, so that would seem to mean he should pay the tax. But since my social security number is on the bonds and since my wife was actually the person who purchased the bonds, I'm wondering if the IRS would think my wife and I (we file a joint return) should pay the tax?


There are lots of possible answers, but the easy one is that when your son redeems the bonds at the bank, they'll ask him who should get the 1099 (and if they don't they'd still probably issue it to him, since he redeemed the bonds). Since it was his money (you just acted on his behalf when he was a minor), he should simply tell the bank that he's the one who gets the 1099.
Best Regards - Mel | | Semper Fi
User avatar
Mel Lindauer
Moderator
 
Posts: 22308
Joined: Mon Feb 19, 2007 9:49 pm
Location: Daytona Beach Shores, Florida

Re: Who pays tax on Savings Bonds with joint owners

Postby HueyLD » Mon Feb 11, 2013 6:05 pm

rickwmm wrote:My mother died around 20 years ago and left approximately $15000 to my son, who was only around five years old at the time. My wife and I used the inheritance money to purchase savings bonds for him.

According to the IRS Pub 550:
If you used your funds to buy the bond, you must pay the tax on the interest.

Since the bond was purchased with your son's money, he is the one who is to pay the tax on redemption.

The Pub 550 further says:
This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. The co-owner who redeemed the bond is a “nominee.”

http://www.irs.gov/publications/p550/ch ... nk10009895
User avatar
HueyLD
 
Posts: 3333
Joined: Mon Jan 14, 2008 11:30 am

Re: Who pays tax on Savings Bonds with joint owners

Postby DickBenson » Mon Feb 11, 2013 7:08 pm

If you used your funds to buy the bond, you must pay the tax on the interest.


What kind of documentation would there be, or required to be, to indicate whose funds were used to purchase the bond? If I used my funds to make a joint purchase of a bond using a relative's SSN, and claimed that I should pay the tax upon redemption, how would they challenge this and/or ask for proof.

They do not say that the 1st owner must pay the tax unless you can show ........

Dick
DickBenson
 
Posts: 809
Joined: Sun Apr 08, 2007 8:27 pm

Re: Who pays tax on Savings Bonds with joint owners

Postby BrandonBogle » Mon Feb 11, 2013 7:20 pm

In my experience (which is limited), most local banks will ask if you are the person whose name is on the bond. They will only cash it for that person absent legal documentation to allow someone else to cash it. Assuming that is true, then they ask if the SSN on the bond is yours or someone elses. If it's yours, case closed and move on. If it's someone elses, they ask which SSN they should report the taxes on. At least, that's the way it has happened to me for the 15 or so I've cashed in my lifetime. Mind you, that last one was over a decade ago, so YMMV.
User avatar
BrandonBogle
 
Posts: 1207
Joined: Tue Jan 29, 2013 12:19 am

Re: Who pays tax on Savings Bonds with joint owners

Postby Watty » Mon Feb 11, 2013 11:36 pm

User avatar
Watty
 
Posts: 4703
Joined: Wed Oct 10, 2007 4:55 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: almeida, Bing [Bot], ERISA Stone, reyarey, RVD, Watertree, Yahoo [Bot] and 59 guests