MURPHY & WEISS
Attorneys, PA

United States Savings Bonds are government-issued and government-backed. They are debt instruments that make periodic interest payments. These payments are added (accrue) to the value of the bond, rather than being paid in cash.

How It Works

You buy a $100 Series EE savings bond from a bank or other financial institution for $50. (Series I and HH bonds, on the other hand, are sold at their full face value.) The next month it is worth $50.17. It continues to grow in value like that for years. After 17 years, new EE bonds are assured of reaching their face value. A bond issued today could actually reach face value sooner, however. Older bonds are assured of reaching "initial maturity" (face value) at different times.

It's easy to make errors with savings bonds that can cost you money. There are a lot of tricks you need to know about them and few ways to find out. Here are common mistakes:

1.   Locking savings bonds away and forgetting them

Although they are designed as long-term investments, some savings bonds perform better than others. Reviewing the performance from time to time makes sense. More importantly, also review the owners and beneficiaries listed on the bonds. What is listed is what will happen! If not what you want, change the bonds to reflect your intentions or else the bonds could be inherited by someone you no longer want to remember.
2.   Redeeming bonds on the wrong day

Interest is credited to a savings bond's value on specific dates twice a year. Redeem one day early, and you can lose everything a bond has earned for the last six months. What are the dates? It depends on when a bond was issued.
3.   Not recognizing bonds that have stopped earning interest

Millions of dollars in expired bonds continue to be held by Americans. Bonds issued in October 1959 or earlier and December 65 to October 69 no longer pay interest.
4.   Not realizing tax implications

Savings Bonds interest is treated as interest income and NOT capital gains.
5.   Paying too much tax on inherited bonds

Savings bonds in an estate can be a headache, Taxes are due on accrued interest at death, and should be paid by the estate or on the deceased's final income tax return rather than by the heirs individually. Heirs who later redeem inherited bonds receive a 1099 for all interest accrued to a bond over its life, whether or not an estate has previously paid taxes!
6.   Trying to transfer bonds to low-tax relatives

Savings bonds are not transferable. The Treasury may, at its discretion, reissue existing savings bonds to other family members if requested and if the taxes are paid on all of the accrued interest on the bonds at the time of reissue. You cannot duck tax consequences by transferring ownership to relatives.