Are You Making the Best Tax Decision for Your Child's Savings Bonds?

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If your young child receives a Series EE U.S. Savings Bond as a birthday gift or perhaps at birth, it is generally in their best interest to pay the tax annually on the EE bond interest rather than have your child defer the tax when bonds are cashed in or mature (in 30 years).

Assuming the child is currently in a low income bracket, and his or her unearned income stays below the annual standard deduction amount for interest on Series EE bonds ($1,000 for 2013) there’s likely no tax to pay for years to come.  Ask your accountant about the possibilities of making a change to this method if you are currently not reporting the income annually.

Alternative:  If the interest isn’t reported annually, your child could pay a hefty tax bill in the year of redemption, which is often true for families cashing in their bonds the first year of college.  If you do find yourself in this situation and paid educational expenses in 2013, ask your tax accountant if you qualify for the “Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989” Form 8815.

Note:  You only have to make the election once on behalf of the child.  However, note that the election does apply to all future years and EE bonds received by the child.

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