Question: My client made substantial purchases of U.S. savings bonds for his children, titled in their names. He would prefer to report the bonds’ accrued interest annually while the children are in lower tax brackets, knowing the other option is to wait to report until the bonds’ final maturity. Since there will not be a 1099-INT, Interest Income, issued each year, how do I determine the annual interest earned? Also, when the bonds are cashed in, how do I inform the IRS that the bond interest was previously reported by the children?

Answer: In the absence of a Form 1099-INT, use Treasury Direct’s savings bond calculator to calculate the annual interest to report for paper bonds. For bonds that are in a TreasuryDirect account, the yearly interest will be displayed in the account information.

When the bonds are ultimately surrendered (cashed in), Treasury will issue a Form 1099-INT for the full amount of interest earned during the entire holding period of the bond(s). For full disclosure, the amount of interest on the Form 1099-INT should be reported on the taxpayer’s Form 1040, Schedule B, Interest and Ordinary Dividends. A second entry should then be made on the Schedule B as “U.S. Savings Bond Interest Previously Reported” and enter amounts previously reported as a negative entry.

Tip: A common question among taxpayers is how long to retain tax records. In this scenario, it is suggested that the taxpayer retain all returns where accrued interest was reported. These can be used to support the subtraction when the bonds in question are actually surrendered, which might be as long as 20 years (or more) later. Tax professionals are encouraged to discuss this optional reporting alternative with their clients during their annual meetings.