Wednesday April 24, 2024

4.11.1 Types of Savings Bonds

Types of Savings Bonds

Series EE and Series HH:  U.S. savings bonds are government backed bonds issued by the Department of Treasury.

Redeeming Savings Bonds:  The lifetime redemption of U.S. savings bonds is relatively straightforward.

Series I Bonds:  Series I bonds are the newest type of savings bond.

Series EE and Series HH
U.S. savings bonds are government backed bonds issued by the Department of Treasury. The two common types are Series EE and Series HH bonds. However, many taxpayers may still hold other types of savings bonds, such as Series E and Series H bonds. With so many types of savings bonds issued over the past 50 years, some savings bonds past their final maturity date no longer earn interest income.

Series EE (formerly Series E) are the most common savings bonds and the most likely type owned by a donor. They are purchased at a discount and are guaranteed a certain value upon "original maturity," which is 20 years after the issue date. The increase in value from the purchase price to the original maturity price reflects accumulated interest income.

Fortunately, this accumulated interest income goes untaxed each and every year it is earned. It is not subject to federal, state or local income taxes as it is earned. The income will be taxable when the bond is redeemed or otherwise disposed of, as discussed below. Alternatively, a taxpayer may elect to realize the interest income each year. See Sec. 454(a). Because of the tax liability of realizing savings bond interest income each year, this is a rare situation.

Redeeming Savings Bonds
The lifetime redemption of U.S. savings bonds is relatively straightforward. Once the bond is redeemed or otherwise disposed of, the owner is taxed on the previously untaxed accumulated income interest. There are literally thousands of financial institutions authorized to redeem savings bonds. A taxpayer need only provide proper identification to one of these financial institutions. However, HH bonds require a bit more time and effort. In particular, the financial institution must send them to the Federal Reserve Bank for redemption.

If a charity is a donor's attorney-in-fact, it is possible in some states for charities to redeem the bonds on a donor's behalf. Nevertheless, the most common practice is for the donor to cash in the savings bonds at his or her local bank. Indeed, this is the simplest and most cost-effective method.

Series I Bonds
Series I bonds are the newest type of savings bond. They accumulate interest income tax-free in a manner similar to EE bonds. However, there are several key differences between I and EE bonds. Most notably, I bonds are purchased at face value. In other words, a $1,000 bond costs $1,000. Interest income is then computed based upon the $1,000 purchase price. The other differences are less instrumental for planned giving purposes. For further information on savings bonds, see www.savingsbonds.gov.

Case Studies on Types of Savings Bonds

Seeing Double with U.S. Savings Bonds, Part 1:   Bill Bonds is a retired construction worker. While still an avid home improvement enthusiast, Bill hung up his hard hat after 40 years in the business.

Seeing Double with U.S. Savings Bonds, Part 2:   Bill Bonds is a retired construction worker. While still an avid home improvement enthusiast, Bill hung up his hard hat after 40 years in the business.

Related Topics on Types of Savings Bonds

3.2.3  Bequests of IRAs and Other IRD Assets:    Some assets transferred to heirs do not receive a stepped-up basis. This "income in respect of a decedent" (IRD) is defined as gross income "not properly includable in computing [decedent's] taxable income for the taxable year ending with the date of his death." Reg. 1.691(a)-1(b). IRD assets are those in which there is either untaxed ordinary income or a deferral of capital gain. When the beneficiary receives the asset, the beneficiary is subject to taxation on the asset, just as the original owner would have been subject to such taxation if he or she had recognized the income or gain.

4.11.2  Transfers During Life:    Treasury regulations greatly restrict the lifetime reissue of savings bonds. 31 C.F.R. 315.6. Therefore, it is generally not recommended for a donor to attempt to reissue savings bonds in a charity's name. Even if a donor may reissue savings bonds in a charity's name, the accumulated interest income is still immediately taxable to the donor at the time of reissue. See PLR 8010082. Therefore, this may discourage a reissue during the life of the donor.

4.11.3  Transfers at Death:    As a general estate and income tax planning strategy, decedents should give "good assets" to family and "bad assets" to charity. Good assets include stocks, real estate and cash. These assets do not generate an income tax liability to an estate or family and, in fact, receive a step up in basis at the decedent's death.

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