To Accrue or to Defer? That Is the Tax Tip Question
Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.
NEW YORK (MainStreet) Here is another choice you may be faced with when preparing a 2013 tax return.
You do not have to report and pay income tax on the interest earned on U.S. Series EE or Series I Savings Bonds until the year they are cashed or mature. However, you can elect to report the interest that "accrues" each year on an annual basis.
For 2013, a dependent child does not have to pay tax on the first $1,000 of income. If the dependent has earned income the Standard Deduction is the greater of $1,000 or the amount of earned income plus $350, not to exceed $6,100.
Children are often given bonds as gifts at birth and as birthday and Christmas gifts. Unless the child has other investment income, such as dividends and bank interest, that will generate close to or more than $1,000, it may be "more better" to report the accrued interest on gifted bonds each year, beginning with the child's year of birth, instead of waiting until they are cashed in.
By doing this the interest on the bonds will be totally, or at least partially, tax-free, until the later teen years when the dependent's earned income may exceed the Standard Deduction amount instead of probably being taxed on 100% of the accrued interest when the bonds are cashed in for college or after graduation.
You do not have to make the election in the first year the dependent owns savings bonds. It can be made in a later year. All interest that has accrued to date is reported as income in the year you make the election. Once you make the election to report the accrued interest annually it will apply to all bonds purchased in subsequent years. This election can be revoked in a future year.
To determine the amount of accrued interest to report you can use the Savings Bond Calculator (1) on the website of the Bureau of Public Debt or, if you have Windows, you can download the Savings Bond Wizard (2) program.
Interest on US Savings Bonds is exempt from state and local income taxes.
--Written by Robert D. Flach for MainStreet