Page 667 - TaxAdviser_2022

CASE STUDY

Tax planning for

bond transactions

Editor: Bond interest is federally taxable when bond monthly and paid when the bond
Patrick L. Young, CPA paid by a corporation, the U.S. Treasury, is redeemed. As they do with Series
or certain federal government agen- EE bonds, cash-basis individuals report
cies, or nontaxable when paid by states, interest on Series I bonds in the year
cities, or political subdivisions. Inves- of maturity (or in the year redeemed,
tors who purchase newly issued bonds if earlier). Taxpayers can use their tax
either pay face value (i.e., purchase at refund to purchase Series I bonds.
par) or acquire the bond at a discount Planning tip: Savings bonds can
Bonds offer tax or premium, depending on market be a sound investment for children
advantages and conditions. When bonds subsequently subject to the kiddie tax. While income
can help protect change hands, their price fluctu- from savings bonds is being deferred,
no kiddie tax liability is incurred. After
ates based on current interest rates,
a portfolio against the quality of the bond, its maturity, graduation, the child can redeem the
inflation. and demand. bonds or elect to accrue the interest to
date. In either case, the child will pre-
Tax-wise strategies for US sumably pay taxes at a rate lower than
savings bonds the parents. Alternatively, the child
Electronic-form Series EE savings can continue to defer the savings bond
bonds are issued at face value. Inter- income and the tax liability thereon
est on Series EE bonds accrues and is after graduation.
paid at the earlier of their redemption
or maturity. For each year prior to Election to accrue
maturity, the bond’s redemption value interest income
increases. This annual increase in value Taxpayers can elect to report interest
represents the interest accrual for each on the accrual method (i.e., as earned)
year. Cash-basis taxpayers generally for Series EE and Series I bonds (Secs.
report the interest earned on Series 454(a) and (c)). If made, the election
EE bonds in the year the bonds are applies to all such bonds owned in the
redeemed or mature, whichever comes year of election and to any subsequently
first. Series EE bonds mature after acquired. Furthermore, in the year of
30 years. election, the taxpayer must report all
Series I U.S. savings bonds combine income accrued on the bonds from the
the features of deferring taxes on the date of acquisition. If the taxpayer holds PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted interest until maturity with inflation- Series HH bonds received in exchange
from Checkpoint Tax Planning and protected growth. Series I bonds are for Series EE bonds, the election also
Advisory Guide’s Individual Tax Planning
topic. Published by Thomson Reuters, issued at face value and pay a fixed in- applies to the accrued Series EE interest
Carrollton, Texas, 2022 (800-431-9025; terest rate plus a semiannual inflation- at the time of the exchange (if such in-
tax.thomsonreuters.com). adjusted rate. Interest is added to the terest was not reported at the time of the

58 December 2022 The Tax Adviser