An elderly relative, now in poor health, has just over 250 US savings bonds that have all matured and have stopped earning interest. All the bonds are Series E and date from 1942-1978. The owner put a second owner on the bonds when they were purchased, but the co-owner is deceased.The total interest is over 95k,though never more than $8250 in any one year that the bonds matured. IRS publication 550 Investment Income and Expenses states that using the cash method of reporting income you postpone reporting the interest until the EARLIER of the year you cash the bond or the year in which they mature. I sent emails to the IRS asking about this and the response was you must report the accrued interest from the matured US savings bonds even though the bonds have not yet been redeemed. I explained that even with the bond interest for that year there was not enough income to have to fill out a tax return, so what happens when the bonds were redeemed. The IRS responded to fill out a tax return even though it wasn't necessary to form a paper trail, or next year when you have the 1099INT, fill out a1040 and attach a statement explaining what would have been claimed on previous returns had you a filing requirement. Is this correct? Should they or can they fill out old 1040's for 2008,2007,2006, etc.? Is there a better option than cashing the bonds? Thank you.
1 Answer from Attorneys
Once the election to report income from savings bonds on a cash basis is made, it cannot be changed. If the couple filed income tax returns and failed to report income earned (that is on the accrual basis) then an election is deemed to have been made to report income on a cash basis. If no previous federal income tax returns have been filed,you could file income tax returns for all open years (that is for the preceding three years) and report the interest income on the accrual basis. When the bonds are cashed in, the tax return for that year can assert the claim that the accrual basis had been elected. The Internal Revenue Service may object to this and take the position that all of the interest is taxable in the year the bonds are cashed in.
Related Questions & Answers
Looking for something else?
10,200 active attorneys ready to answer your legal questions today.
Featured Attorneys
Earn additional revenue and grow your business.
