Most people who have savings bonds hold them for reasons such as having a rainy day savings or for a specific purpose in the future. Many of these bonds were purchased many years ago and have accrued a significant amount of interest over the years. And all that interest will be taxable by the IRS when they are redeemed.
Very often, bonds are found in a safe deposit box or in a drawer when a person dies. Since E bonds and EE bonds may no longer be converted into H bonds with the interest being deferred, a person normally cashes in these bonds, pays the tax, and either spends or reinvests the net proceeds.
However, you may want to have your cake and eat it too. While you may wish to make a donation of the savings bonds to charity, you cannot do so during your lifetime, as savings bonds may not be transferred to an organization this way. However, they can be used in a gifting arrangement, whereby the bonds are cashed in, and then the net proceeds are given away.
To the extent that you itemize your taxes, you will receive an income tax deduction for the value of the gift to the charity, which will be an offsetting deduction against the interest reported on your income tax return as taxable income. However; if you want to derive some income from the gift, you may convert the assets into a charitable gift annuity. The result will be receipt of income during your lifetime and a charitable deduction for a significant portion of the gift.
By counting the income received from the gift annuity as well as the tax deduction for the gift, you may have more money left over time than if you had merely cashed the bonds in and paid the tax. Most tax exempt organizations will accept gift annuities, but the usual minimum for a gift is $10,000 in cash or other assets.
by: Hyman G. Darling, Esq.
Thanks for the great idea. Elders should also remember that long term care costs are often 100% income tax deductible and offer the opportunity to shelter income generated by cashing in bonds.
Posted by: Patti Spencer | October 22, 2008 at 08:10 PM