U. S. Savings Bonds

[Christian]

A client called requesting the amount he can give to his daughter before having to file a gift tax return. I advised him it is $16,000 per person. He is going to give her that amount in savings bonds he has which are still accruing interest. I advised him to ascertain what the bonds current value is to avoid overshooting the $16,000 limit. After giving it more thought I believe I made a mistake. When she cashes those bonds she will pay taxes on the interest. I feel sure a bank or whoever cashes them for her will send a Form 1099-T to her at yearend. That being so the $16,000 gift should be calculated on what her did paid for the bonds back when he bought them. This would of course allow him to give her a significantly greater number of these bonds. Is this correct ? A $16,000 gift of cash would be tax free to the daughter.

[joanmcq]

I do believe you are correct. The gift is what the bonds cost, not the value upon maturity.  

[Sara EA]

When ownership of a US Savings Bond is transferred, the original owner must report all previously accrued interest on his or her tax return for that year.  The new owner must then continue to report the interest that accrues each year.  The same rules apply to inherited bonds.  From Pub 550:

Ownership transferred. If you bought Series
E, Series EE, or Series I bonds entirely with
your own funds and had them reissued in your
co-owner's name or beneficiary's name alone,
you must include in your gross income for the
year of reissue all interest that you earned on
these bonds and have not previously reported.

The current value of the bonds would be the amount gifted.  I'm not sure how you'd calculate basis.  Heck, is this guy ever going to reach the $12M lifetime exemption?  Just give the daughter the bonds and file a gift tax return.  No gift tax owed, and the expense of filing the return will probably be less than looking up the law on basis of gifted bonds and crunching all those numbers.

[Sara EA]

From the instructions to Form 709: The value of a gift is the fair market value (FMV) of the property on the date the gift is made (valuation date).

I don't think basis comes into play, unless Series H bonds.  Your client will report the current value of the bonds as the gift and report all previously accrued interest on his tax return.  While he seems to want to avoid filing a gift tax return (even though it is unlikely any gift tax will be due), the bigger problem is adding all that interest to his income in one year, potentially raising his marginal bracket, taxing more Soc Sec, increased Medicare surcharge, etc.  You can crunch those numbers for him and perhaps end up advising him to spread the gift over a few years.

[Lion EA]

Don't forget that if he gives her $16,000 of bonds but wants to NOT file a gift tax return, that he can give her NO other gifts in the same year, no birthday, holiday, any reason gifts.

[Christian]

Goooooooooooooooooooooood grief ! I will need to call him and let him decide. He will likely decide not to donate them. 

[DANRVAN]

On 7/9/2022 at 8:08 PM, Lion EA said:

that he can give her NO other gifts in the same year, no birthday, holiday, any reason gifts.

Wow, that sounds brutal!

But I it will depend on facts and circumstances.

If the child is a minor dependent, then I believe most of those gifts could be considered support: clothing, recreation,  transportation...if reasonable.

 

 

[Christian]

Oh no she is not a dependent but an adult. I am going to give him the relevant page from Pub 550. The problem lies in when she cashes the bonds and how to identify what part of the interest he will have paid taxes on. I feel sure he can resolve it.

[Lee B]

57 minutes ago, DANRVAN said:

Wow, that sounds brutal!

But I it will depend on facts and circumstances.

If the child is a minor dependent, then I believe most of those gifts could be considered support: clothing, recreation,  transportation...if reasonable.

 

 

Or if it ends up in a savings or investment account, then it won't be support

[Lion EA]

$16,000 per person per year. Not $16,000 at one time and $1,000 later in the year and $500 for her birthday. If OP's client did that, a gift tax return would be required. But OP said his client did NOT want to file a gift tax return. Unless his client has been very generous during his lifetime, he's not likely to owe any gift tax with the return.

[Sara EA]

I doubt that any of us even question clients about these lesser gifts.  I've filed lots of gift tax returns but have never asked if they also gave their offspring $25 with a birthday card, bought them a sweater for Christmas, or took them out for lunch last Sunday.  Nor has any client volunteered this info.  Should I be asking?  Would the IRS actually ask about this?  The only ones I can think of who would care would be the states if the giver eventually applied for Medicaid.

Christian, Pub 550 contains detailed information and an example of how to report previously taxed interest.  Essentially you report the amount on the 1099INT when the bond is cased (which will be all the interest the bond earned since purchased), the enter on another line "U.S. Savings Bond Interest Previously Reported” as a negative number.  This will include the accrued interest her dad reported when he transferred the bond and the accrued interest she was required to report each year after that.

Since most savings bonds are online now, and this one will be when transferred, do advise your clients to create an inventory at treasurydirect.gov.   You enter the bond purchase date, face amount, and serial number, and you can update it each year.  While treasurydirect will give you the accrued interest each year, only the inventory gives you the lifetime amounts as well.  This way when the bond is cashed you have a clear record of how much accrued interest was already taxed.  (I once complained to treasurydirect that I couldn't find the total accrued interest, and they told me to use the inventory feature.)

 

[DANRVAN]

2 hours ago, Sara EA said:

I doubt that any of us even question clients about these lesser gifts.  I've filed lots of gift tax returns but have never asked if they also gave their offspring $25 with a birthday card, bought them a sweater for Christmas, or took them out for lunch last Sunday.

I agree with you Sara, those items are immaterial, and right or wrong I have never itemized them out on  form 709.

[DANRVAN]

19 minutes ago, DANRVAN said:

I agree with you Sara, those items are immaterial, and right or wrong I have never itemized them out on  form 709.

And along that same line, it is not common practice to itemize every single piece of personal property owned by the decedent on form 706; 10 pairs of socks @ $5, 6 blue jeans @ $10...........etc.

[Sara EA]

When I filed my mother's inventory with the state years ago, the attorney told me that she was the only decedent she'd ever encountered who had cash in her possession!

[Catherine]

Incidental and basically valueless items such as birthday cards, a cake, and the like, don't count. I tell my clients if the limit is $16,000, not to give more than $15,500 so there is room for a nice birthday or Christmas gift, or sudden repair-the-dishwasher help. And that last $500 could be the Christmas gift.

[Lion EA]

I tend to tell them to stop about $1,000 short for those same reasons. And, then mom comes in and shows me her canceled check for $15,000 and brags about buying him over $3,000 in ski gear for Christmas!