Who pays tax on Savings Bonds with joint owners

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rickwmm
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Who pays tax on Savings Bonds with joint owners

Post by rickwmm »

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?
user5027
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Re: Who pays tax on Savings Bonds with joint owners

Post by user5027 »

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
crowd79
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Re: Who pays tax on Savings Bonds with joint owners

Post by crowd79 »

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?
sscritic
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Re: Who pays tax on Savings Bonds with joint owners

Post by sscritic »

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.
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Mel Lindauer
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Re: Who pays tax on Savings Bonds with joint owners

Post by Mel Lindauer »

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.
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HueyLD
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Re: Who pays tax on Savings Bonds with joint owners

Post by HueyLD »

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Last edited by HueyLD on Mon Feb 09, 2015 12:34 pm, edited 1 time in total.
DickBenson
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Re: Who pays tax on Savings Bonds with joint owners

Post by DickBenson »

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
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BrandonBogle
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Re: Who pays tax on Savings Bonds with joint owners

Post by BrandonBogle »

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.
jrbdmb
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Re: Who pays tax on Savings Bonds with joint owners

Post by jrbdmb »

(Zombie thread warning ...)

Unfortunately the above link no longer works, and I have a similar question. Some of the savings bonds given by relatives and friends to my child have co-owners listed - child as the first owner, parent as the second owner. I believe that in all cases the child signed the bonds. So in this case the interest should be on the child's tax return?
jrbdmb
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Re: Who pays tax on Savings Bonds with joint owners

Post by jrbdmb »

From Zacks:
Bond Co-Owners: If there are two listed owners on a savings bond, the Treasury refers to the owners as co-owners. Each co-owner of the bond has equal ownership rights, including the right to cash the bond at any time. One co-owner can redeem the bond without the signature of the other co-owner. If one co-owner dies, the surviving co-owner becomes the single listed owner of the bond.

Co-Owners and Taxes: The basic rule is that the person who paid for the purchase of a savings bond is responsible for paying the taxes on the interest. If one of the two co-owners paid for the savings bond, that owner is responsible for declaring the interest and paying the taxes. If the co-owners shared the cost of the bond, each will declare a proportional share of the interest earned for tax purposes.
Unfortunately this doesn't address the situation of a gifted bond, where neither of the co-owners paid for it. Maybe you extrapolate and say the co-owners split the interest; but it would make just as much sense to say since the bond was meant for the child that the child gets the interest and taxes. Or since the parent often ends up using the bonds to pay for a child's college, they get the interest and taxes. Clear as mud.

From The Balance:
Co-ownership between spouses, family members, parents, children, or other parties means that two or more people hold title to the savings bonds together. Any of them can cash the bonds without the permission or knowledge of the others, triggering a taxable event for everyone.
"Triggering a taxable event for everyone." What does that even mean? :confused
nalor511
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Re: Who pays tax on Savings Bonds with joint owners

Post by nalor511 »

Taxable event for everyone, in the event you had deferred the interest.

A true Gift is owned by the recipient, thus they pay the taxes. A CO ownership is not a gift. Must know how it's titled. It seems like the title determines taxation.
dukeblue219
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Re: Who pays tax on Savings Bonds with joint owners

Post by dukeblue219 »

I have/had paper EEs that were originally gifted by my great grandparents 30 ish years ago. They have my name with varying middle initials, varying addresses, varying SSNs, and varying co-owners. The local Big Brand Bank has not blinked an eye cashing them, as all have my first and last name correct. I tried to send the last few to Treasury Direct for conversion to avoid going into a bank branch, and it was a nightmare.

Don't bother trying to convert them without your SSN on them. I was told I'd need the original purchaser to attest that they were mine. Good luck with that.
jrbdmb
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Re: Who pays tax on Savings Bonds with joint owners

Post by jrbdmb »

nalor511 wrote: Sun Mar 07, 2021 8:33 pm Taxable event for everyone, in the event you had deferred the interest.

A true Gift is owned by the recipient, thus they pay the taxes. A CO ownership is not a gift. Must know how it's titled. It seems like the title determines taxation.
My father gave EE bonds to my son for future use. He decided to make my son and I co-owners - we are both listed on the bond - "<Child name> OR <Parent name>." I would get the "not a gift" if I had purchased the bond, but in this case I don't think that applies.

In any event I'll probably just go with how the bank where we cashed the bonds split up the interest via the 1099s, even though I'm not sure they did it right either.
DavidC
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Re: Who pays tax on Savings Bonds with joint owners

Post by DavidC »

jrbdmb wrote: Sun Mar 07, 2021 6:50 pm (Zombie thread warning ...)

Unfortunately the above link no longer works, and I have a similar question. Some of the savings bonds given by relatives and friends to my child have co-owners listed - child as the first owner, parent as the second owner. I believe that in all cases the child signed the bonds. So in this case the interest should be on the child's tax return?
The web archive has a cached version, the core of the page is simply repeating the rules from IRS Publication 550 but that doesn't directly cover this situation. In the comments of the Savings Bond Advisor website "shannon" (March 5, 2008) and "Sue" (February 5, 2009) both have the same situation as you and Tom's answer (to both) is whoever cashes the bond pays the interest.

Although I cannot come up with an official answer, Tom's answer seems correct: the IRS wants the principal owner(s) of the bond to pay the interest but in the absence of a principal owner that just leaves "whoever cashed the bond and received the money" as the last option. Which fortunately should line up with the 1099-INT form that will be issued by the bank/credit union (or the Fed).

[Side-note, if the child is still under 19 years old then the "Kiddie tax" may come into play. The savings bond interest would still be filed on the child's tax return... but the tax rate imposed above the threshold would be at the parent's rate. I'm not an expert on the "Kiddie tax" though and it may not apply here anyway.]
In true boglehead fashion my chief concern is saving enough to withstand 7 consecutive biblical plagues. - TheNightsToCome
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