Robert D Flach for Mainstreet.com writes: 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.
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