Cashing in Savings Bond — Taxes

 

I read your article on US savings bonds in Sunday’s paper 11/22/15. You stated that you must pay federal income tax on the bonds in the year that they mature, even if you don’t cash them in.

As far as paper bonds (unregistered with Treasury Direct) are concerned, I’m wondering if you can hold the bond until after maturity and then cash it in by taking it to a bank. Wouldn’t the bank issue a 1099 for interest income in the year the bond is cashed regardless of the maturity date? How would IRS know that the bond matured in an earlier year if the bank issues the 1099 for the year cashed vs. year matured?

Terry Says:  I don’t know how aggressive the IRS is going to be.  Jackie Brahney  of SavingsBonds.com and I both did a lot of research on whether the date of bond maturity is on the 1099 that is given out when a bond is cashed in.

Here’s what Jackie wrote to me:  “The Treasury indicated that I should just go to the bank and cash them in regardless of when the bonds matured. They indicated the bonds’ maturity year would NOT be posted on the 1099-INT, only the interest earned $ amount. When I asked same rep about reporting interest on bonds that have already reached final maturity, (I used for example, 2010, over 5 years ago) the Treasury rep said that I should speak with a tax advisor as they weren’t sure what would happen in the event of an audit.  Note: I’ve never heard that a bond’s final maturity date was included on a 1099-INT.”

That, of course, applies to paper bonds.  There will be a much easier trail to follow when people start cashing in electronic bonds.  The government will already have all that information about maturity dates.

Look, there are many IRS rules that people don’t follow to the letter — and are unlikely to be picked up except if there is an audit.   It just depends on how easily you sleep at night!   I gave you the official rules — and MANY people wrote to ask how the IRS would “know” if you cashed in savings bonds after the year of final maturity.  Many are concerned that cashing in a lot of old bonds in one year will push them into a higher tax bracket or income level causing them to pay more for Medicare Part B, etc.

You’d think the IRS has a lot more to do than hound savers who did the right thing by buying savings bonds — and who inadvertently wait to cash them in.  But then again, you never know!