Tax Tips on POD Savings Bonds

U.S. savings bonds guarantee return on principal.

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Some buy United States savings bonds for children as gifts to invest in their future. Others buy savings bonds for themselves out of patriotism, to help the U.S. finance its borrowing needs and as a conservative foundation for their investment portfolio. Still others buy savings bonds and hold them indefinitely until they think they need them. If the original holder dies, the beneficiary receives the bond’s proceeds. These savings bonds label beneficiaries as “payable on death” or P.O.D.

One Bondholder and Beneficiary

On a paper U.S. savings bond that names one owner and a beneficiary, the registration states P.O.D. before the beneficiary’s name -- for example, John Lewis P.O.D. Mary Lewis. In this case, the first name is the bondholder and the second name shown after the P.O.D. is the beneficiary who will receive the bond’s proceeds upon the death of the bondholder. Therefore, Mary receives John’s bond proceeds only upon his death. Before then, only John can conduct transactions involving the savings bond.

Bond Interest

Some holders of U.S. savings bonds opt to recognize the interest that accrues on the bond each year as part of their taxable income. The Internal Revenue Service does not require this. Indeed, when the holder or her beneficiary cashes in the savings bond, the bank or financial institution that cashes the bond will issue her a Form 1099-INT. The 1099-INT will include all the interest accrued; it will not omit any interest income already claimed. It is the sole responsibility of the bondholder to track those claims.

Double Taxation

If the savings bondholder forgets he already paid taxes on the interest and cashes in the bond, he will include the 1099-INT income in his current year taxes. If the savings bondholder dies and the beneficiary does not realize the deceased bondholder already paid taxes on the interest, the beneficiary will include the 1099-INT income from the bond in her current year taxes. In both cases, whoever cashes in the bond pays double in taxes on the savings bond interest income. This can be corrected.

Double Taxation Avoidance

To avoid double taxation, bondholders must keep copies of the federal income tax returns and supporting material over the life of the savings bond. Beneficiaries must discuss with the bondholder any income reporting she may be doing. Beneficiaries can also check the bondholder’s or estate’s tax records to see if the bondholder already claimed the bond’s interest income. If the bondholder discovers the double counting mistake after filing taxes, she can file an amended return to get a tax refund.