Tax Planning

Retirement Planning

Did you know that a person retiring at age 65 spends an average of 18 years in retirement? Experts estimate that you'll need 70-80% of your pre-retirement income—lower earners will need 90 percent or more—to maintain your standard of living when you stop working. This is based on the assumption that you'll cut out many of your current expenses, like commuting costs, when you retire.

When you use savings bonds during retirement, you can:

• Avoid dipping into your retirement accounts early by using your bonds instead.
• Defer paying taxes on the interest that your bonds earn until you redeem them.
• Cash bonds when you retire and report the tax-deferred interest as income at that time (when you might be in a lower income tax bracket).
• Savings bonds are backed by the full faith and credit of the United States government

Education Planning

Education Tax Exclusion

The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989, when the bond owner pays qualified higher education expenses at an eligible institution.

Additional Requirements to Qualify

• Qualified higher education expenses must be incurred during the same tax year in which the bonds are redeemed.
• You must be at least 24 years old on the first day of the month in which you bought the bond(s).
• When using bonds for your child's education, the bonds must be registered in your name and/or your spouse's name. Your child can be listed as a beneficiary on the bond, but not as a co-owner.
• When using bonds for your own education, the bonds must be registered in your name.
• If you're married, you must file a joint return to qualify for the exclusion.
• You must meet certain income requirements.
• Your post-secondary institution must qualify for the program by being a college, university, or vocational school that meets the standards for federal assistance (such as guaranteed student loan programs).

Qualified Expenses

Qualified educational expenses include:

• Tuition and fees (such as lab fees and other required course expenses).
• Expenses that benefit you, your spouse, or a dependent for whom you claim an exemption.
• Expenses paid for any course required as part of a degree or certificate-granting program.
• Expenses paid for sports, games, or hobbies qualify only if part of a degree or certificate program.

Note: The costs of books or room and board are not qualified expenses.

The amount of qualified expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other forms of tuition reduction.

You must use both the principal and interest from the bonds to pay qualified expenses to exclude the interest from your gross income. If the amount of eligible bonds you've cashed during the year exceeds the amount of qualified educational expenses paid during the year, the amount of excludable interest is reduced pro rata.

Example: Assuming bond proceeds equal $10,000 ($8,000 principal and $2,000 interest) and the qualified educational expenses are $8,000, you could exclude 80 percent of the interest earned, which would equal $1,600. (.8 x 2000 = $1,600)

Income Limitations

The full interest exclusion is only available to married couples filing joint returns and to single filers. Modified adjusted gross income includes the interest earned under a certain limit in each case. These income limits apply in the year you use bonds for educational purposes, not the year you buy the bonds. Exclusion benefits are phased out for joint or single filers with modified adjusted gross income that exceeds the limit. Full instructions and limits are outlined on IRS Form 8815.

Tax Year 2006 Income Limits

For single taxpayers, the tax exclusion begins to be reduced with a $63,100 modified adjusted gross income and is eliminated for adjusted gross incomes of $78,100 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $94,700 modified adjusted gross income and is eliminated for adjusted gross incomes of $124,700 and above. Married couples must file jointly to be eligible for the exclusion.

Another Education Savings Option

Aside from the Education Tax Exclusion, there is another way to use savings bonds to pay for your children's education expenses. Interest income on bonds purchased in a child's name alone or with a parent as beneficiary (not co-owner), can be included in the child's income each year as it accrues, or can be deferred until the bonds are redeemed. In either case, the child will be subject to any federal income tax on the interest.

Parents may file a federal income tax return in the child's name (the child will need to have a Social Security Number), reporting the total accrued interest on all bonds registered to the child. The intention to report savings bond interest annually, i.e., on an accrual basis, must be noted on the return.

The decision to report accrued interest income annually applies to all future years, and can be changed only by filing IRS Form 3115 with the IRS. Full details of this option and its requirements are outlined in IRS Publication 550, "Investment Income and Expenses."

No tax will be due unless the child has total income in a single year equal to the threshold amount that requires a return to be filed, and no further returns need to be filed until that annual income level has been reached. Starting with tax year 2006, for children under the age of 18, unearned income over a specified threshold amount for that age group will be taxed at the parent's rate. If the child is age 18 or older, income will be taxed at the child's rate.

With this approach, the tax liability on the bond interest is determined on an annual basis so that when the bonds are redeemed, only the current year's accrual will be subject to federal income tax. Make sure you keep complete records when using this system.

More Information

You can find more information about the education bond program in IRS Publications Online:

• IRS Publication 17, "Your Federal Income Tax"
• IRS Publication 550, "Investment Income and Expenses"
• IRS Publication 970, "Tax Benefits for Higher Education"
• IRS Publication 929, "Tax Rules for Children and Dependents"

Estate Planning

Savings bonds can be useful in estate planning because, on the death of the original bond owner, the co-owner or beneficiary becomes the owner. A will is not needed.

It's important to register your bonds correctly. Registrations for Series EE and I Bonds, both electronic and paper bonds, can vary, so it's a good idea to find out how to register each type of bond. View information about registrations for EE and I Savings Bonds.

Trusts

A trust is a right of property, real or personal, held by one person appointed or required by law to administer a trust, for the benefit of another.

• Can be created for any purpose, which is not illegal, or against public policy.
• No limit to the number of trustees or the number of persons who may create a trust.
• Can be established by any organization or competent adult holding a legal title to property.
• A testamentary trust can be created under the will of a decedent.

The person who creates a trust is called the grantor, maker, donor, trustor, or settlor. The person charged with administering a trust is called the trustee. The party for whose benefit a trust is created, or who is to enjoy the income of the trust, is called the beneficiary or donee.

Paper savings bonds may be registered in the name of a trust. At this time, TreasuryDirect does not allow trust registrations on electronic bonds.

Trust Instrument

A Trust Instrument is the document that sets out in writing the authority, duties, and rights of the parties involved. The instrument may be called an Agreement, Indenture, Declaration, or Deed. In the case of a testamentary trust, the trust instrument is the decedent's will.

Savings Bonds in Trust Form

At this time, the following information on trust registration applies only to paper bonds.

Bonds can be registered to trusts in the name of the trustee of a personal trust estate. Personal trust estates are defined in the governing regulations as trust estates established by natural persons in their own right for the benefit of themselves or other natural persons in whole or in part, and common trust funds comprised in whole or in part of such trust estates.

Bonds registered to individuals may be reissued to a personal trust estate as follows:

• Single ownership form may be reissued to a new sole owner including a trustee of a personal trust estate created by the owner or which designates as beneficiary either the owner or a person related to him/her by blood (including legal adoption) or marriage.
• Co-ownership form may be reissued to a trustee of a personal trust estate created by either co-owner or by someone else if either co-owner is a beneficiary of the trust or a beneficiary of the trust is related by blood or marriage to either co-owner.
• Beneficiary form may be reissued to eliminate the names of the owner and the beneficiary and to name as new owner the trustee of a personal trust estate, which was created by the owner or which designates as beneficiary either the owner or a person related to him/her by blood (including legal adoption) or marriage.

For information about reissuing bonds in a trust, see How to Reissue Bonds to a Trust.

Proper Registration

Registration of a bond issued to a trust must include:

• The full given name(s) of the trustee(s) and the full given name(s) of the grantor(s) of the trust.
• The surname must be shown for each trustee and grantor even if they both have the same surname.
• An adequate identifying reference, such as the date the trust was created, to the authority governing the trust.
• The SSN or employer identification number that the grantor uses to identify the trust.
• When more than one trustee is to be named in the registration, and all are required to execute any subsequent transaction request, "or" should not appear in the registration between their names.
• When the trustee and the grantor are the same person, bonds are registered "Trustee's name," trustee under declaration of trust dated "date of trust instrument."
• When the trustee and the grantor are not the same person, bonds are registered "Trustee's name," under agreement with "Grantor's name," dated "date of trust instrument."

Examples of authorized registrations can be found on our Sample Registrations page.

Irrevocable and Revocable Trusts

An irrevocable trust is one that the grantor may not rescind or cancel. The governing regulations do not require that either term be included in the registration of bonds.

A revocable trust is one which the grantor has the option of rescinding or canceling.

More information on personal trusts is available in our Q&A.

Get information on reissuing bonds to a trust, submitting requests for reissue, and redeeming bonds belonging to a trust.

Reissuing Savings Bonds to a Trust

How to Reissue Bonds to a Trust

At this time, the following information on trust registration applies only to paper bonds, not electronic bonds registered on TreasuryDirect.

• A PD F 1851 must be signed by everyone named in the current registration of the bonds, in the presence of an authorized certifying officer, except that the signature of a beneficiary is not required for EE, HH, or I Bonds.
• If one of two people named on the bonds is deceased, then the PD F 1851 and a certified copy of the death certificate must be provided. The death certificate is not needed if the deceased person is a beneficiary named on EE, HH, or I Bonds.
• Pay special attention to item 5 on the PD F 1851 as it concerns tax matters.

Additional Requirements for Reissue of HH/H Bonds to a Trust

When Series HH/H Bonds are reissued to a trust, the new owner must certify that the taxpayer identification number is correct and must not be subject to backup withholding. Certification is accomplished by completing an IRS Form W-9 or a similar certification statement on the PD F 1851 (reissue application).

Who is responsible for signing the Form W-9:

• If an SSN is provided to identify the trust, the Form W-9 must be filled out and signed by the person to whom the SSN belongs.
• If an employer identification number is provided to identify the trust, one of the trustees must complete and sign the Form W-9. The certification statement is incorporated in the most recent versions of the PD F 1851; therefore, if the person whose certification is required has joined in signing the PD F 1851 and provided the appropriate taxpayer identification number on that form, a separate Form W-9 will not be required.

When Direct Deposit is Required

When Series HH Bonds bearing issue dates of October 1989 and thereafter are reissued to a personal trust, a trustee must complete and sign an SF 1199A providing the appropriate direct deposit information for semiannual interest payments.

The forms mentioned above are available at financial institutions in the United States.

Where to Submit Requests for Reissue

The bonds, PD F 1851, IRS Form W-9, and SF 1199A (if appropriate), and any required evidence should be submitted to your Treasury Retail Securities Site.

How to Redeem Bonds Belonging to a Trust

When bonds are registered in the name of a trust, the trustee(s) requests payment. Local banks are authorized to redeem bonds registered in the name(s) of the trustee(s) of a personal trust.

You can give savings bonds for any occasion or purpose - like birthdays, weddings, or graduations. You can buy gift bonds in several denominations and choose either electronic or paper form.

Buy Electronic Gift Bonds at TreasuryDirect

To buy an electronic savings bond:

• You must already have a TreasuryDirect account.
• Use the Gift Box functionality to buy gift bonds.
• Keep them in your account until you're ready to deliver them.

To give an electronic savings bond, you must know the recipient's:

• Full name
• Social Security Number (SSN) and/or taxpayer ID number
• TreasuryDirect account number

When the bond is delivered to the recipient's TreasuryDirect account, he or she will get an e-mail announcing your gift.

You must be 18 or older to create a TreasuryDirect account and to buy gift bonds. A child under 18 can get gift deliveries in a Minor linked account.

Buy Paper Gift Bonds at Financial Institutions

To buy paper gift bonds:

• Visit any financial institution, fill out the purchase application, and pay the cashier.
• You'll receive your bond within three weeks. If you're making a last-minute purchase, ask the financial institution to mail the bond directly to the recipient.
• Ask for a gift certificate or download and print one below.

If you don't know the recipient's SSN, you can use your own SSN. Should this happen:

• Your SSN will appear on the bond. (The first five digits of your Social Security number will be masked and replaced with asterisks).
• You'll incur no tax liability.
• It won't be used toward your annual purchase limit.

Gift Certificates

Gift information can't be printed on savings bonds. So announce your savings bond gift with a gift certificate.

Tax Planning

Savings bonds offer many tax advantages:

• Savings bonds are exempt from state and local income taxes. But, savings bonds are subject to state and local estate taxes, inheritance, gift, and other excise taxes, whether Federal or State.
• The education tax exclusion permits qualified taxpayers to exclude from their gross income all or a portion of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989. The bond owner must use the bonds to pay for qualified higher education expenses at an eligible institution. Find out more about Education Planning.
• Buy savings bonds in a child's name. If the child's interest is reported annually, taxes might be eliminated on interest earnings during years when the child's income is sufficiently low.
• When planning for retirement keep in mind that you can cash bonds to supplement your retirement income and report the tax-deferred interest as income for that year, when you may be in a lower income tax bracket.

If you only look at the rate your savings bonds are earning, they may not seem like a competitive investment at first. But when you factor in all the tax advantages, your bonds are earning more than you think.

Reporting Interest

There are two ways you can report the interest your bonds earn.

1. Report the interest as it accrues annually.
2. Wait until the bonds are redeemed or reach final maturity.

If you want to switch from deferred reporting to annual reporting of interest, you must do it for all your savings bonds. You must also report all interest earned up to the year of the change in reporting procedure. You must submit IRS Form 3115 if you later wish to change back from annual reporting to deferred reporting. The fee for Form 3115 is waived in these cases.