Tax on I-Bonds Transfer

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Steelersfan
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Tax on I-Bonds Transfer

Post by Steelersfan » Tue Aug 15, 2017 12:57 pm

I have four I-Bonds in a single Treasury Direct account which I want to transfer to my two children to pay tuition when their kids go to college. Each of my children has two kids. I learned that when I transfer the bonds to them I will incur tax on the accrued interest. If I could somehow get the bonds titled in their names, when the bonds are redeemed and used to pay college tuition no tax will be due.

I’m going to transfer the bonds to them regardless, but do any I-Bond experts know of a way to legally transfer the bonds to them without incurring the tax liability at time of transfer?

mega317
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Re: Tax on I-Bonds Transfer

Post by mega317 » Tue Aug 15, 2017 1:20 pm

I don't know the answer to your question. Rather than worrying about this can you just pay the tuition directly?

pshonore
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Re: Tax on I-Bonds Transfer

Post by pshonore » Tue Aug 15, 2017 1:27 pm

Not sure thats how the program works:

from http://www.kiplinger.com/article/taxes/ ... ition.html
I bonds and EE bonds issued after 1989 are eligible for the tax break. To qualify, you -- the bond owner -- must have been at least 24 years old when the bond was issued, and you must use the money to pay qualified education expenses for yourself, your spouse or a dependent. Tuition and fees qualify; room and board do not.

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Steelersfan
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Re: Tax on I-Bonds Transfer

Post by Steelersfan » Tue Aug 15, 2017 1:35 pm

pshonore wrote:
Tue Aug 15, 2017 1:27 pm
Not sure thats how the program works:

from http://www.kiplinger.com/article/taxes/ ... ition.html
I bonds and EE bonds issued after 1989 are eligible for the tax break. To qualify, you -- the bond owner -- must have been at least 24 years old when the bond was issued, and you must use the money to pay qualified education expenses for yourself, your spouse or a dependent. Tuition and fees qualify; room and board do not.
I can't pay the tuition directly and get the tax exemption because the tuition must be for a dependent. In my situation the tuition is for a grand child.
That's why I'm transferring the bonds to the parents. Even if I have to pay taxes now (which I'm prepared to do) the additional accrued interest over the next decade before the grandchildren go to college adds up and will be exempt from tax.

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Mel Lindauer
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Re: Tax on I-Bonds Transfer

Post by Mel Lindauer » Tue Aug 15, 2017 3:26 pm

Did you ever consider holding on to the existing Savings Bonds and simply gifting money that the parents could use to purchase new I Bonds in their name which could then be used, tax-free, for your grandchildren's education?

Seems like a simple solution unless you simply don't have the money to gift without redeeming the Savings Bonds.
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KlingKlang
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Re: Tax on I-Bonds Transfer

Post by KlingKlang » Tue Aug 15, 2017 3:58 pm

I don't think that you can really transfer I-Bonds, what you are doing is actually cashing them in under your own identity and then giving the proceeds to someone else - perhaps to purchase new I-Bonds.

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Steelersfan
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Re: Tax on I-Bonds Transfer

Post by Steelersfan » Tue Aug 15, 2017 4:12 pm

Mel Lindauer wrote:
Tue Aug 15, 2017 3:26 pm
Did you ever consider holding on to the existing Savings Bonds and simply gifting money that the parents could use to purchase new I Bonds in their name which could then be used, tax-free, for your grandchildren's education?

Seems like a simple solution unless you simply don't have the money to gift without redeeming the Savings Bonds.
I already gift them each year an amount which goes into the grand kids' 529 plans. This would just be a somewhat larger gift whichever year I transfer the bonds to the parents.

The bonds are about half way to maturity. I look at it this way.

1. I can gift them via transfer and pay the taxes on about half the total interest to be paid over the life of the bonds. Then when the parents use them for tuition and no more taxes are due.

2. I can hold them until maturity, but then I pay taxes on the entire 30 years of accrued interest at that time.

3. If I don't make it all the way to when they mature, my estate has to pay taxes for however long they've been held. There's no step up basis for the accrued interest.

I was just hoping that one of our knowledgeable and clever Bodgleheads had another alternative.

Thanks for the suggestion.

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Re: Tax on I-Bonds Transfer

Post by Jack FFR1846 » Tue Aug 15, 2017 4:19 pm

Perhaps do the rollover into a 529.

https://www.fastweb.com/financial-aid/a ... vings-plan

I don't know the rules, but don't see why this couldn't be done. At some future point, change the beneficiary to the grandchildren and then they use it for educational expenses.
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Re: Tax on I-Bonds Transfer

Post by cas » Tue Aug 15, 2017 4:32 pm

Suppose you do transfer the bonds to your children.

Will your children (who will now be the "owner" (s) referred to in the rules) have been at least 24 years old when the bonds were originally issued? (Not when they received the bonds as a gift ... when the bonds were originally issued to you.) It is possible that they were, but that is a rule that seems to get a lot of people when this issue comes up on this forum from time to time.

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Re: Tax on I-Bonds Transfer

Post by cas » Tue Aug 15, 2017 4:41 pm

Steelersfan wrote:
Tue Aug 15, 2017 4:12 pm
3. If I don't make it all the way to when they mature, my estate has to pay taxes for however long they've been held. There's no step up basis for the accrued interest.
I am not a lawyer, but my understanding from what lawyers (eg. bsteiner) have said in these forums on the matter is that there are (at least) three options if the original owner dies before bond maturity:

1. Report it on the final income taxes of the original owner.
2. Have the estate report it as estate income.
3. Pass the interest on untaxed to the beneficiary, and the beneficiary will eventually owe tax on it. (Or, if the beneficiary was at least 24 when the bonds were originally issued and meets all the other rules, the beneficiary could potentially use it tax-free for their children's educational expenses.)

Sorry, no immediate reference ... you might want to try googling (or search-boxing) bsteiner and savings bonds and see if the post I'm thinking of turns up.

Edit: Whoops. After I re-read this I realized this could be interpreted as an "answer" to your question about how to transfer the bonds with interest intact. It wasn't intended to be! My primary intent was the side issue of pointing out that there might be more options than you listed in the item I quoted above.
Last edited by cas on Tue Aug 15, 2017 4:47 pm, edited 1 time in total.

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Re: Tax on I-Bonds Transfer

Post by Steelersfan » Tue Aug 15, 2017 4:46 pm

cas wrote:
Tue Aug 15, 2017 4:32 pm
Suppose you do transfer the bonds to your children.

Will your children (who will now be the "owner" (s) referred to in the rules) have been at least 24 years old when the bonds were originally issued? (Not when they received the bonds as a gift ... when the bonds were originally issued to you.) It is possible that they were, but that is a rule that seems to get a lot of people when this issue comes up on this forum from time to time.
Good catch (and memory). One of them was a year too young.

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Steelersfan
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Re: Tax on I-Bonds Transfer

Post by Steelersfan » Tue Aug 15, 2017 4:56 pm

Jack FFR1846 wrote:
Tue Aug 15, 2017 4:19 pm
Perhaps do the rollover into a 529.

https://www.fastweb.com/financial-aid/a ... vings-plan

I don't know the rules, but don't see why this couldn't be done. At some future point, change the beneficiary to the grandchildren and then they use it for educational expenses.
Thanks for the suggestion. However I don't pass the income test and would have to pay the taxes at transfer. One of my objectives (unstated) is to simplify my financial affairs. Trading a Treasury Direct account for a 529 account doesn't do that.

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Steelersfan
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Re: Tax on I-Bonds Transfer

Post by Steelersfan » Tue Aug 15, 2017 5:12 pm

cas wrote:
Tue Aug 15, 2017 4:41 pm
Steelersfan wrote:
Tue Aug 15, 2017 4:12 pm
3. If I don't make it all the way to when they mature, my estate has to pay taxes for however long they've been held. There's no step up basis for the accrued interest.
I am not a lawyer, but my understanding from what lawyers (eg. bsteiner) have said in these forums on the matter is that there are (at least) three options if the original owner dies before bond maturity:

1. Report it on the final income taxes of the original owner.
2. Have the estate report it as estate income.
3. Pass the interest on untaxed to the beneficiary, and the beneficiary will eventually owe tax on it. (Or, if the beneficiary was at least 24 when the bonds were originally issued and meets all the other rules, the beneficiary could potentially use it tax-free for their children's educational expenses.)

Sorry, no immediate reference ... you might want to try googling (or search-boxing) bsteiner and savings bonds and see if the post I'm thinking of turns up.

Edit: Whoops. After I re-read this I realized this could be interpreted as an "answer" to your question about how to transfer the bonds with interest intact. It wasn't intended to be! My primary intent was the side issue of pointing out that there might be more options than you listed in the item I quoted above.
Thanks for that, but I'm committed to transferring them now so they never end up in my estate.

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Re: Tax on I-Bonds Transfer

Post by cas » Wed Aug 16, 2017 5:51 am

Steelersfan wrote:
Tue Aug 15, 2017 5:12 pm
Thanks for that, but I'm committed to transferring them now so they never end up in my estate.
One other bit of (unasked for) advice: If/when you do gift the bonds, make sure that you give documentation to the new owner(s) of the bonds about the amount of accrued interest on which you already paid tax at the time of the gift. (Some sort of documentation that would satisfy the IRS in an audit.) And make sure the recipients know to put that documentation someplace where they will remember to use it when the bonds are ultimately redeemed.

Here's why: When the savings bonds are ultimately redeemed, a 1099-INT will be issued that will include all interest, regardless of whether some of that interest has already had taxes paid on it or not. The owner will then need to adjust that interest amount (by the amount of interest that you already reported at the time of the gift) on their Schedule B in order to avoid needlessly paying tax on the same interest twice. (Yes, the double taxation problem goes away if the savings bond was used for education and all the rules were met, but just in case things don't end up working out that way, documentation of how much interest you already reported to the IRS will suddenly become very useful.)

IRS Publication 550 ( https://www.irs.gov/pub/irs-pdf/p550.pdf ) :

"Form 1099-INT for U.S. savings bond interest. " p 10
When you cash a bond, the bank or other payer that redeems it must give you a Form
1099-INT . . . However, your Form 1099-INT may show more interest than you have to include on your income tax return. For example, this may happen if any of the following are true. . . .
  • Ownership of the bond was transferred. The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer.
"U.S. savings bond interest previously reported." p. 18
If you received a Form 1099-INT for U.S. savings bond interest, the form may show
interest you do not have to report. . . . On Schedule B . . . report all the interest shown on your Form 1099-INT. Then follow these steps.
1. Several lines above line 2, enter a subtotal of all interest listed on line 1.
2. Below the subtotal enter “U.S. Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond.
3. Subtract these amounts from the subtotal and enter the result on line 2.

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Steelersfan
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Re: Tax on I-Bonds Transfer

Post by Steelersfan » Wed Aug 16, 2017 7:44 am

cas wrote:
Wed Aug 16, 2017 5:51 am

One other bit of (unasked for) advice: If/when you do gift the bonds, make sure that you give documentation to the new owner(s) of the bonds about the amount of accrued interest on which you already paid tax at the time of the gift. (Some sort of documentation that would satisfy the IRS in an audit.) And make sure the recipients know to put that documentation someplace where they will remember to use it when the bonds are ultimately redeemed.

Here's why: When the savings bonds are ultimately redeemed, a 1099-INT will be issued that will include all interest, regardless of whether some of that interest has already had taxes paid on it or not. The owner will then need to adjust that interest amount (by the amount of interest that you already reported at the time of the gift) on their Schedule B in order to avoid needlessly paying tax on the same interest twice. (Yes, the double taxation problem goes away if the savings bond was used for education and all the rules were met, but just in case things don't end up working out that way, documentation of how much interest you already reported to the IRS will suddenly become very useful.)
Excellent advice, and I would not have known that if you hadn't pointed it out.

Thanks to all the posters who helped guide me through this. The Bogleheads forum shines again.

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