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Pay tax now on child’s Savings Bonds

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in Small Business Tax,Small Business Tax Deduction Strategies

Usually, you don’t voluntarily pay tax sooner rather than later, but you might make an exception when your young child receives Series EE U.S. Savings Bonds.

Strategy: Elect to pay income tax annually on the EE Bond interest. In other words, instead of having your child defer the tax until they are cashed in or mature, report the accrued interest on the child’s federal income tax return each year.

Due to the child’s low tax bracket, there’s likely no tax to pay for years to come. 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, especially if the child cashes in all the bonds in the same tax year (e.g., the child’s freshman year at college).

You must pay tax on all accrued interest in the year of the election and report any subsequent interest in taxable income the year it accrues.

Tip: The election is only made once, but it applies to all future EE Bonds received by the child.

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