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12-04-2017 06:45 PM
My grandmother past away about a year ago and just recently my Mom found three $10,000 dollar EE savings bonds, that my grandmother had purchased back in 1992, in a safety deposit box.
The issue is that the three bonds are all issued in my grandmother's name and my Mom's name and they want to divide the three bonds 3-ways between the 3 surviving children equally with the least amount of hassle when it comes to paperwork and taxes.
The only simple solution I could come up with is just to have my Mom cash the three bonds, then deduct the taxes owed from the bonds worth and split that remaining amount 3 ways by having my Mom write gift checks to her brother and sister.
The following is a breakdown of this possible solution:
Bonds and Taxes
Totals Bonds Worth: $51,036.00 ($17,012.00 each bond)
Total Bond Taxable Interest: $36,036.00 ($12,012.00 each bond)
Federal Taxes Due on All Bonds: $9,009.00 (taxed at 25% marginal rate)
Marginal Tax Bracket 2017
15%: $18,651 - $75,900
25%: $75,901 - $153,100
Total Bonds Worth: $51,036.00
Federal Taxes Due: -$9,009.00
Total to be Split 3-Ways: $42,027.00
Mom: $23,018 ($14,009 + $9,009 to cover taxes)
Does this seems plausible? Or is there a simpler way to divide the 3 bonds equally?
Thanks for any assistance...
12-04-2017 08:22 PM
Welcome to the H&R Block community.
One thing that your mom and her siblings should take into account is that if any of them has a child who will be going to college then the owner of the bonds can cash them in tax-free provided that they use the interest to pay for their child's qualifying education expenses. The interest is tax-free to the extent that it is used on education expenses.
The same is true of most of both series EE and series I bonds. So if there is anyone going to college I would suggest that your mom hold on to the bonds and then use them to help pay those expenses first before splitting the remainder three ways. That will save you a lot of money on the income tax. Note that because the bonds are issued in your mom's name only she can exclude the interest from taxation when the funds are used for someone's education expenses.
If education expenses are not a part of the equation (nobody's going to college or everyone has already graduated) then yes, cashing in the bonds and splitting them up after paying tax would be the easiest way to split them up. The bonds are in your mom's name so the income has to be reported on her tax return, but you're correct that her siblings' share can be given to them as a non-taxable gift of up to $14,000 per year each. A gift is never taxable to the recipient, but if more than $14,000 is given in a year to the same person then the person who gave the money has to file a gift tax return and may have to pay the gift/estate tax later on in life (note that if the tax bill passes there won't be an estate tax).
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)
12-05-2017 01:18 PM
Thanks, I do have a couple of follow up questions about the following...
"One thing that your mom and her siblings should take into account is that if any of them has a child who will be going to college then the owner of the bonds can cash them in tax-free provided that they use the interest to pay for their child's qualifying education expenses. The interest is tax-free to the extent that it is used on education expenses."
My Mom does have 3 grandchildren in college, but we have found it confusing on how you would exactly use the $9000 of taxable interest for the 3 grandkids in a tax-free way.
Does it involved creating a 529 or is there a way to use the $9,000 tax-free directly for her grandkids tuition without a 529?
Also, how would it impact any financial aid they may be currently receiving?
12-05-2017 06:01 PM
You're quite welcome.
The EE & I series interest exclusion is figured on Form 8815. You do not have to open a 529 account or any other tax-favored education savings account.
The kids can still receive other financial aid and that will not be affected by using some bond interest toward their education costs. However, the other tax-free financial aid will reduce the amount of bond interest that can be used tax free. If you can't use all of the interest tax free each year then a suggestion might be for your mom to cash in one bond each year and use the interest from that bond and then do the same the following year and the same again the year after that.
If some of the financial aid that the kids are already receiving is coming from a 529 account then assign that to room & board costs first. This will allow you to use more of the bond interest. 529 account funds are the one and only education benefit where room & board, to the extent that the educational institution normally charges, counts as a qualifying expense.