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jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3161
Experience:  I've prepared all types of taxes since 1987.
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I redeemed EE savings bonds in June to help pay ...

Resolved Question:

I redeemed EE savings bonds in June to help pay closing costs on my new home. The bonds earned about $5,000 in interest. I now have $5,000 avalaible to reinvest. Is there any way to reinvest this to avoid paying income taxes on the interest earned?
Submitted: 9 years ago.
Category: Tax
Expert:  jgordosea replied 9 years ago.


The interest earned on your savings bonds is subject to federal income tax either upon redemption, final maturity, or other disposition. As soon as one of those events occurred the interest is taxable to you; regardless of what is done with the proceeds.

This answer presumes that you chose to have the federal tax deferred until the year of final maturity, redemption, or other taxable disposition (as does almost everyone) Rather than electing to report interest annually each year as it accrues. Once you begin with the accrual method you must continue to report interest earned annually for all savings bonds and notes you own and for any that you may later acquire. This method can be advantageous for savings bonds in a child's name.

Unfortunately, other planning moves such as accelerating deductions or deferring income for year 2007 are no longer available as the year is over. One change to your 2007 tax liability at this time could be to make a contribution to a deductible IRA for year 2007 if you are eligible to take a deduction (that is, you had earned income and are not over income linits if you are eligible for a retirement plan at work). Please see for links to more information, if applicable.

I hope this helps (even though it is likely not what you wanted to hear) for including the interest in income. Best wishes for the New Year.

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