Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

August 11, 2013
Can I avoid paying taxes on the interest when I cash U.S. savings bonds?

Q: I own U.S. savings bonds that will no longer earn interest in 2015. My question is: If I cash them in, is there any way I can avoid paying tax on that interest? I would like to give the money to my three children, but I cannot afford to pay taxes on a large amount. I am an 80-year-old widow on a fixed income. Thank you.


A: Under most circumstances, you cannot avoid paying tax on the interest you receive when you cash in U.S. savings bonds. Assuming you did not elect to report the accrued interest on the bonds each year, you must report the interest at the earlier of the date the bond matures or the date you cash it.

There is a special rule for Series E bonds that allows you to defer paying tax on the interest if you purchase another U.S. government obligation or make a tax-free exchange into another nontransferable U.S obligation. Series E bonds were last issued in 1979 with 30-year maturities, so chances are you do not hold any of them if your bonds mature in 2015. You probably own Series EE, HH, or I bonds. There are no current tax-free exchanges of EE, HH or I bonds. EE bondholders used to be able to exchange them for HH bonds, but the government stopped issuing HH bonds.

Under certain circumstances, Series EE bonds can be cashed and the interest excluded from income. If an adult over age 24 purchases EE bonds, which are registered in their name or their name and the name of a child, and later cashes the bonds and uses the proceeds to pay for qualified higher education expenses for the bond owner, their spouse or dependent, the interest on the bonds is not taxable. Qualified higher education expenses are limited to tuition and required fees at eligible institutions. There is an income limit on this exclusion. In 2012, single taxpayers with income over $72,850 started to lose the benefit of the exclusion. No exclusion was available if income exceeded $87,850. For married taxpayers filing joint returns the phase-out range was $109,250 to $139,250.

It appears that making a gift of a U.S. savings bond triggers the recognition of the accrued interest as of the transfer, unlike some other assets. So it does not appear to be possible to shift the unrecognized income to another person by gifting the bonds. If you change the name on the bonds to another person, the interest becomes taxable to the original owner.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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