Savings bonds 911

Sheila_GDecember 11, 2005

I checked the previous post on savings bonds, but it didn't address my issue, so here goes.

My mother recently gave me and my brother a bunch of Series E US savings bonds that she purchased for us over the years during our childhood and apparently forgot about until she came across them a few months ago (her memory has been fading for some time). They range from 33 to 43 years old and all reached their full maturity between 1997 and 2002. They are co-owned by her and either me or my brother. Since I'd never really dealt with savings bonds, I did some research and realized that the interest income should have been reported either annually or (since they have not been redeemed) in the year they reached maturity. I checked with my mother, who not only did not report any interest income on these bonds, but informs me that she has a boxful of additional fully matured series E bonds! According to my reasearch, the interest income is technically hers as the primary owner, since they were purchased with her funds and the ownership was not transferred to us, but my brother and I are willing to assume any tax liability for the bonds she gave us since we will actually be receiving the interest. The interst on my and my brother's bonds is about $48,000 total and who knows how much on the boxful of bonds I haven't seen yet.

What kind of tax penalties will I incur when I redeem the bonds, since the interest should have been reported 2 to 8 years ago? Will either my mom or I have to restate interest income for the tax years that the bonds matured or can I just claim it for the year I actually redeem the bonds?

Any advice/suggestions will be appreciated.

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mxyplx

From my TaxCut program it would seem the interest is state tax exempt and not Federally reportable till the bonds are cashed ie no penalty.

    Bookmark   December 11, 2005 at 8:24PM
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mxyplx

I took EE bonds to be the same as E bonds w/r to reporting. That may be rong--see paragraph 3 below. Depends on when they were bought - see paragragh 4 below - that could be significant.

Current tax programs probly don't consider the E's as they are obsolete.

www.publicdebt.treas.gov

Series E

Series E bonds were first issued in May 1941. They played a major role in financing World War II and continued as a stable method of debt financing. Series E bonds were withdrawn from sale as of June 30, 1980. They were replaced by Series EE bonds.

Series E bonds are accrual bonds which were issued at 75 percent of face amount. Series E bonds were issued in denominations of $10, $25, $50, $75, $100, $200, $500, $1,000, $10,000, and $100,000. (Note: Eligibility to buy the $10 and $100,000 Series E bonds was limited.) Interest is paid at redemption as part of the current redemption value. Series E bonds may be redeemed by many financial institutions and by Federal Reserve Banks. To find out what Series E bonds are worth, try our online Savings Bond Calculator.

Series E interest is reportable for Federal income tax purposes for the year in which the Series E bonds are redeemed, reach final maturity, or are otherwise disposed of, whichever occurs earliest; alternatively, a bond owner may elect to report Series E interest as it accrues. P

Series E bonds have had varying original maturity periods depending on their issue dates, ranging from 10 years for the oldest bonds to 5 years for the last ones issued. Series E bonds issued from May 1941 to November 1965 have been granted three 10-year extended maturity periods. Those issued after November 1965 have been granted two 10-year extended maturity periods. Series E bonds issued from May 1952 through November 1965 have been granted an additional extension sufficient in length to make their total interest-accruing life spans 40 years. Those issued in December 1965 and after have been granted an additional extension sufficient to make their total interest-accruing life spans 30 years.
==============================
www.wwwebtax.com

All of the accumulated interest on E and EE US Savings Bonds is taxable in the tax year that they mature and must be reported on your tax return. One way to avoid the tax is to trade the E or EE US Savings Bonds for HH bonds. This will continue to defer the tax and you won't need to report the tax on your tax return. Special tax rules apply for US Savings Bond Tuition Plans.

Series HH US Savings Bonds cannot be purchased and are offered only in exchange for Series E and EE US Savings Bonds or Freedom Shares. They pay semi-annual interest that is taxable in the tax year received and must be reported on your tax return.

    Bookmark   December 12, 2005 at 1:58PM
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Sheila_G

Thanks for the reply. A few of the bonds had 40-year life spans, but most had 30 year. All are now well past their maturity dates. Paragraph 3 is what concerns me. It sounds as if either mom or I will have to file amended tax returns to report the accrued interest in the years the bonds reached full maturity, at least on the most recent ones. (Is there a statute of limitations for amended returns?) Of course, that probably means penalties for under reporting in addition to owed taxes. I guess I can look at it from the perspective that since the interest from the bonds themselves will cover any penalties and whatever is left is still "free" money to me. I just hate the thought of losing money simply because I didn't know she had them and wasn't able to help her monitor them.

    Bookmark   December 12, 2005 at 6:58PM
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mxyplx

Guess you need a pro for this one.

Its not clear to me how to swap the E's for HH's or if it can be done after the maturity as your situation is. If you can swap it would solve things.

Amended filing can potentially trigger an audit; the odds of this happening being dependant on the dollar amount.

Here is a clue on Statue of Limitations:

Statute of Limitations
In most cases, the statute of limitationsÂthe deadline for the IRS to decide it wants to audit youÂon your tax return expires three years after the due date of the return. Your return for 2005 is due April 15, 2006 so the auditing period ends April 15, 2009. If you haven't been alerted to an audit by then, you probably never will be, so it's probably safe to toss most of the records that back up your return.

In some cases, though, the IRS gets six years to come after you. The extended jeopardy applies if you fail to report income that is 25% or more of the amount of gross income you do report. And if you fail to file a return or the IRS can prove that you committed fraud, there's no limit. (This sure doesn't look like fraud at this point because there is presumably no intent).

So! 2000 is the 6th year back-------

One thing you might consider is to just cash in the bonds or just a few of the bonds > 6 years past maturity to see what happens and let the Guvmnt figure it out. They may not catch it.
=====================================

You are talking a lot of money here and the cost of a GOOD tax program is insignificant by comparison. The help and search functions may be very instructive and you may be able to set up trial returns with several variations to see what happens. I do this a couple times a year to check things out. You might consider a professional/commercial program instead of the peon programs most of us need.

    Bookmark   December 12, 2005 at 8:56PM
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Sheila_G

I appreciate your suggestions. Thanks, Mxyplx!

    Bookmark   December 13, 2005 at 9:31AM
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Don_

I want to suggest a web site you should visit. It will help you immensely.

http://www.publicdebt.treas.gov/sav/savwizar.htm

    Bookmark   December 13, 2005 at 4:08PM
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joyfulguy

It seems to me that your best route is to go down to the tax department and lay your cards on the table, emphasizing your mother's forgetfulness, etc.

I imagine they'll assess you as of the date of cashing.

If they assess related to the date of maturity, you may have some interest to pay on the unpaid balance - but I doubt that they'll charge a penalty.

My opinion - for what it's worth.

Should you choose to cash (probably only a few) now, possibly the cashing agency will offer some information.

If not, I think that I'd ask them, as many financial institutions' staff (especially the more seasoned ones) have relevant information.

That may give you some ideas as to what route to travel.

Do you have an accountant? Ask them.

Or perhaps a family member uses an accountant - most of them know such info as you need.

As a matter of fact - it might be wise to consult one, anyway - you have a substantial amount to deal with, here.

They were issued by a federal agency, and quite likely the cashing of a substantial amount would alert the income tax people.

You want to go to them, before they come looking for you: they get much less willing to give any allowances, when they take the initiative. Get quite snarky, in fact. More likely to trigger an audit, as well, possibly.

Good wishes for the holidays - looks as though you came up with a nice Christmas present.

ole joyful

    Bookmark   December 13, 2005 at 4:45PM
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Sheila_G

Thanks to all who responded. I did talk to IRS. Mom does have to report the interest income on her taxes, but there won't be an issue with a late penalty, so the person I talked to at IRS "didn't" suggest that they not all be redeemed in a single tax year if it would put her in a higher tax bracket. In any event, any tax she incurs will be taken care of and yes, joyful, it's a very nice Christmas present from a very nice lady I love with all my heart.

~Sheila~

    Bookmark   December 16, 2005 at 7:37PM
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