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October 26, 2006
U.S Series EE Bonds
Do you have any United States Series EE Savings bonds? If you’re like most people, I bet you have a few lying around. Today, I’d like to share some information about these bonds and a tip that might enable you to cash them without paying taxes on the interest you earned!
Historically, people purchased EE bonds at half of their face value and when they matured, and you cashed them in, the other half was considered interest income. Because these are Federal obligations, the interest is never taxable in Massachusetts, only on your federal return.
Nowadays, you can purchase “electronic” Series EE bonds directly from the U.S. Treasury. These electronic bonds are purchased at face value and earn a fixed amount of interest. All EE bonds issued after May 1, 2005 earn a fixed amount of interest. EE Bonds issued before May 1, 2005 had fluctuating interest rates. The minimum investment required is $25, and you would either get a paper $50 bond or an electronic $25 bond. I guess one of the benefits of these electronic bonds is you will never lose them! The U.S. Treasury offers a program where you can turn in your paper bonds and have them replaced with electronic bonds.
WHEN SHOULD EE BONDS BE CASHED IN?
Series EE Bonds should be cashed in before their final maturity dates for the following reasons.
· If you fail to cash the Series EE bond before its final maturity, you will be losing money because the bond will no longer be earning interest.
· IRS regulations state that you must report the interest income when the bond is cashed or reaches it final maturity, whichever occurs first.
This is where it gets interesting. Let’s say that you own a $50 Series EE savings bond that had a final maturity date of June 30, 2003. The regulations state that you must report the interest (interest is the difference between the $25 you paid for the bond and its redemption value) on your 2003 tax return.
Let’s say that in the year 2006, you discover that you have this bond that is no longer earning interest, its final maturity date was June 30, 2003, and you cash it. The regulations say that you must go back and amend your 2003 income tax return and pay the associated tax, interest and penalties. It is not income for 2006, the year you cashed it.
Let’s go one step further and say that you didn’t cash the bond until 2007 and that you had never reported the interest back in 2003 when the bond finally matured. The regulations say that you must amend your 2003 tax return, however, the statute of limitations has passed and you may no longer amend the 2003 tax return. It would appear that you would escape taxation for the entire amount of the interest you earned. This is no different than if you forgot to deduct a large tax deduction in a prior year. If more than 3 years have passed since you filed that tax return, you are not allowed to go back and amend, you lost your deduction.
There are some practical problems with the scenario described above. Mainly, when you cash your bond you will receive a 1099, and even if the bond had fully matured years ago, the 1099 will have the current years date on it. You need to be prepared to explain to the IRS why you are not reporting interest that the bank that cashed your bond said that you earned.
By writing this article I am not recommending that you wait over 3 years after the final maturity date of your bonds and attempt to cash them tax-free. In certain cases the statute of limitations may increase beyond 3 years and in extreme cases it may go on for ever. If you have old savings bonds that have reached their final maturity, seek the advice of a competent tax advisor.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org