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Table 6-1. Who Pays the Tax on U.S. Savings Bond Interest plus any amount you had to pay at the time of
the trade.
IF... THEN the interest must be reported by...
you buy a bond in your name and the name of another you. Example. You traded Series EE bonds (on
person as co-owners, using only your own funds which you postponed reporting the interest) for
you buy a bond in the name of another person, who is the the person for whom you bought the bond. $2,500 in Series HH bonds and $223 in cash.
sole owner of the bond You reported the $223 as taxable income on
you and another person buy a bond as co-owners, each both you and the other co-owner, in proportion to the your tax return. At the time of the trade, the Ser-
contributing part of the purchase price amount each paid for the bond. ies EE bonds had accrued interest of $523 and
you and your spouse, who live in a community property you and your spouse. If you file separate returns, both you a redemption value of $2,723. You hold the Ser-
state, buy a bond that is community property and your spouse generally report one-half of the interest. ies HH bonds until maturity, when you receive
information about how a person who is a nomi- EE savings bond. The bond was issued to you $2,500. You must report $300 as interest in-
nee reports interest income belonging to an- and your spouse as co-owners. You both post- come in the year of maturity. This is the differ-
other person. pone reporting interest on the bond. You later ence between their redemption value, $2,500,
have the bond reissued as two $500 bonds, and your cost, $2,200 (the amount you paid for
Both co-owners' funds used. If you and one in your name and one in your spouse's the Series EE bonds). It is also the difference
the other co-owner each contribute part of the name. At that time, neither you nor your spouse between the accrued interest of $523 on the
bond's purchase price, the interest is generally has to report the interest earned to the date of Series EE bonds and the $223 cash received
taxable to each of you, in proportion to the reissue. on the trade.
amount each of you paid. Choice to report interest in year of trade.
Community property. If you and your Example 2. You bought a $1,000 Series You could have chosen to treat all of the previ-
spouse live in a community property state and EE savings bond entirely with your own funds. ously unreported accrued interest on the Series
hold bonds as community property, one-half of The bond was issued to you and your spouse EE or Series E bonds traded for Series HH
the interest is considered received by each of as co-owners. You both postpone reporting in- bonds as income in the year of the trade. If you
you. If you file separate returns, each of you terest on the bond. You later have the bond re- made this choice, it is treated as a change from
must generally report one-half of the bond inter- issued as two $500 bonds, one in your name method 1. See Change from method 1, earlier.
est. For more information about community and one in your spouse's name. You must re- Form 1099-INT for U.S. savings bonds inter-
property, see Pub. 555. port half the interest earned to the date of reis- est. When you cash a bond, the bank or other
sue.
Table 6-1. These rules are also shown in payer that redeems it must give you a Form
Table 6-1. Transfer to a trust. If you own Series E, Ser- 1099-INT if the interest part of the payment you
ies EE, or Series I bonds and transfer them to a
receive is $10 or more. Box 3 of your Form
Ownership transferred. If you bought Series trust, giving up all rights of ownership, you must 1099-INT should show the interest as the differ-
E, Series EE, or Series I bonds entirely with include in your income for that year the interest ence between the amount you received and the
your own funds and had them reissued in your earned to the date of transfer if you have not al- amount paid for the bond. However, your Form
co-owner's name or beneficiary's name alone, ready reported it. However, if you are consid- 1099-INT may show more interest than you
you must include in your gross income for the ered the owner of the trust and if the increase in have to include on your income tax return. For
year of reissue all interest that you earned on value both before and after the transfer contin- example, this may happen if any of the following
these bonds and have not previously reported. ues to be taxable to you, you can continue to are true.
But, if the bonds were reissued in your name defer reporting the interest earned each year.
alone, you don't have to report the interest ac- You must include the total interest in your in- • You chose to report the increase in the re-
crued at that time. come in the year you cash or dispose of the demption value of the bond each year. The
This same rule applies when bonds (other bonds or the year the bonds finally mature, interest shown on your Form 1099-INT
than bonds held as community property) are whichever is earlier. won't be reduced by amounts previously
transferred between spouses or incident to di- The same rules apply to previously unrepor- included in income.
vorce. ted interest on Series EE or Series E bonds if • You received the bond from a decedent.
Purchased jointly. If you and a co-owner the transfer to a trust consisted of Series HH or The interest shown on your Form 1099-INT
won't be reduced by any interest reported
each contributed funds to buy Series E, Series Series H bonds you acquired in a trade for the by the decedent before death, or on the
Series EE or Series E bonds. See Savings
EE, or Series I bonds jointly and later have the bonds traded, later. decedent's final return, or by the estate on
bonds reissued in the co-owner's name alone, the estate's income tax return.
you must include in your gross income for the Decedents. The manner of reporting interest
year of reissue your share of all the interest income on Series E, Series EE, or Series I • Ownership of the bond was transferred.
earned on the bonds that you have not previ- bonds, after the death of the owner (decedent), The interest shown on your Form 1099-INT
ously reported. The former co-owner doesn't depends on the accounting and income-report- won't be reduced by interest that accrued
have to include in gross income at the time of ing methods previously used by the decedent. before the transfer.
reissue his or her share of the interest earned This is explained in chapter 1 of Pub. 550. • You were named as a co-owner, and the
that was not reported before the transfer. This Savings bonds traded. If you postponed re- other co-owner contributed funds to buy
interest, however, as well as all interest earned the bond. The interest shown on your Form
after the reissue, is income to the former porting the interest on your Series EE or Series 1099-INT won't be reduced by the amount
E bonds, you didn't recognize taxable income
co-owner. you received as nominee for the other
This income-reporting rule also applies when you traded the bonds for Series HH or co-owner. (See Co-owners, earlier in this
when the bonds are reissued in the name of Series H bonds, unless you received cash in chapter, for more information about the re-
your former co-owner and a new co-owner. But the trade. (You can't trade Series I bonds for porting requirements.)
Series HH bonds. After August 31, 2004, you
the new co-owner will report only his or her
share of the interest earned after the transfer. can't trade any other series of bonds for Series • You received the bond in a taxable distri-
HH bonds.) Any cash you received is income
If bonds that you and a co-owner bought bution from a retirement or profit-sharing
jointly are reissued to each of you separately in up to the amount of the interest earned on the plan. The interest shown on your Form
bonds traded. When your Series HH or Series
the same proportion as your contribution to the 1099-INT won't be reduced by the interest
purchase price, neither you nor your co-owner H bonds mature, or if you dispose of them be- portion of the amount taxable as a distribu-
fore maturity, you report as interest the differ-
has to report at that time the interest earned be- tion from the plan and not taxable as inter-
fore the bonds were reissued. ence between their redemption value and your est. (This amount is generally shown on
cost. Your cost is the sum of the amount you
Example 1. You and your spouse each paid for the traded Series EE or Series E bonds
spent an equal amount to buy a $1,000 Series
Chapter 6 Interest Income Page 57