Suppose your young child receives a Series EE U.S. Savings Bond as a birthday gift. Or maybe you’ve received bonds for a child just born.
Strategy: Plan on electing to pay the tax annually on the EE bond interest. In other words, instead of having your child defer the tax when bonds are cashed in or mature—30 years from now—choose to pay the tax on the child’s return for 2013.
Why would you make this election? In the child’s current low bracket, there’s likely no tax to pay for years to come, assuming his or her unearned income stays below the annual standard deduction amount ($1,000 for 2013). And the tax bill, if any, should be relatively small when your child finally redeems the bonds.
In contrast, if the interest isn’t reported annually, your child could pay a hefty tax bill in the year of redemption. This is especially true if you have your child cash in all the bonds in the same tax year (e.g., the child’s freshman year at college).
Tip: You only have to make the election once on behalf of the child. But then it applies to all future years and EE bonds received by the child.