Investors hold fully matured U.S. savings bonds because they don’t want to report large amounts of taxable interest on their income tax returns when they redeem the bonds. But if you hold the bonds until you die, your heirs will be hit with the tax bill. You could use a charitable donation to offset the tax bite while you are alive or spare your heirs from paying the taxes.
There is no way you can avoid income tax on your bonds’ interest by giving the bonds to charity during your lifetime. U.S. Treasury rules don’t allow you to name a charity as co-owner or death beneficiary of savings bonds. And you can't transfer ownership of your bonds to a charitable organization while you're alive.
You can give your favorite charity a donation from your savings bond holdings by redeeming your bonds and giving the cash proceeds. You will have to add the accumulated interest to your taxable income, but you can offset most or all of that addition to income if you itemize on your tax return and take the amount you gave to the charity as a tax deduction. As of 2012, Internal Revenue Service rules allow you to deduct up to 50 percent of your gross income for charitable donations.
You can leave your savings bonds to your favorite charity in your will. By doing so, your estate and your heirs will avoid taxes on the interest. To do this, you write a provision in your will that the savings bonds belong to the charitable organization when you die. Your estate administrator distributes the bonds to the charity for redemption. The bonds never count as part of your estate so there is no tax liability for your heirs. The charity reports the interest when it redeems the bonds, but because charities are tax-exempt there will be no tax due.
If you have a large holding of savings bonds, you can spare your heirs the income tax on the interest while providing them with income by setting up a charitable remainder trust. As of 2012, the IRS allows you in your will to name the trust as the bonds’ owner when you die. This type of trust is tax-exempt, so the trustee can redeem your bonds without paying the tax and reinvest all the proceeds. The trust pays your heirs a percentage of the trust’s assets each year, typically 5 percent, for a set term of years or the heirs’ lifetime. Your heirs must pay income tax on the trust’s payments. When the payment term expires or the last of your heirs die, the proceeds remaining in the trust go to the charity you selected when you established the trust.
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