Gifting savings bonds

January 25, 2011

Consider gifting tax and income tax when mulling whether to gift savings bonds.

Q: My father wants to give my siblings and me some savings bonds, but I've heard it might be better to wait until he dies and leave them to us as part of his will. Is that true?

The first issue will be the gift tax and the second issue the income tax. If your father gifts more than $13,000 to any one sibling in a calendar year, the gift will be subject to a federal gift tax of 35%. He could avoid that gift tax by filing a form 709 gift tax return and electing to use some of his lifetime $1 million exemption. Of course, if the gifts were less than $13,000 to each sibling, there would be no gift tax.

Many owners of savings bonds defer paying the income tax on the interest until the bond matures or they cash them. The bonds then carry deferred interest. If your father gifts savings bonds with deferred interest, he would have to pay income tax on all the interest at the time of the gift.

Send your money management questions to medec@advanstar.com
. Answers to our readers' questions were provided by Rial Moulton, JD, CFP, CPA/PFS, cofounder of Retirement & Tax Planning Specialists, Inc., Spokane, Washington.