U.S. Savings Bond Maturity Trap and Tax Penalty
Did you buy U.S. Savings Bonds decades ago? Or like me, received them as gifts from your grandparents? If you do, take a look at them before April 15 rolls around. Your bonds may have matured. That means they are no longer earning interest, and it also means you need to cash them in. I was fortunate enough to catch this before it was too late. Don't lose out on earning some interest on your bonds.
Check those maturity dates.
Sometimes people hold U.S. Savings Bonds past the date of final maturity
That's a problem. In fact, it's a violation of IRS statutes. If you hold these bonds after the date of final maturity, it opens the door to a possible tax penalty and/or fine for you. IRS Publication 550
states that once that savings bond passes its final maturity date, the interest accumulated over the life of the bond must be reported on that year's federal tax return.
What should happen.
You are supposed to pay tax on a U.S. Savings Bond in one of two ways. Most bondholders choose to defer the tax until the bond matures. They redeem the bond and then report the interest through a 1099-INT form
. Some choose to pay the tax annually prior to cashing the bond in, by reporting the increase in the value of the bond as interest each year.
What happens instead.
People hold the bonds too long and have to pay a lump sum and sometimes penalties in light of what the IRS considers under reported unearned income.
What if you held a U.S. Savings Bond too long?
Well, if it has been less than three years since your bond stopped earning interest, you may be able to file an amended federal tax return
without being penalized. What if more than three years have passed since your bond earned interest? The sooner you cash it in and report the interest, the better. The longer you wait to cash in the bond, the longer it is not earning interest and the larger the penalty you could face.