Savings bond taxes

My mother bought E-bonds in the 1940s in her name and mine. In 1976 she exchanged the E-bonds for H-bonds in my name and my children's. Twice a year we deposit the H-bond interest into my children's account, but my husband and I must report the earnings as ours. We would like to use the bonds to finance our children's education but recognize the income taxes due on the deferred E-bond interest. How can we convert these H-bonds to cash or arrange ownership of the bonds in the children's names and not ours? --

Exchanging E-bonds for H-bonds in 1976 should have triggered the payment of taxes on the E-bonds' accrued interest, because it was your mother's money that bought the E-bonds. If the exchange was made with no income-tax liability, then you must have signed the application for exchange as the principal owner. You can have the H-bonds reissued in your children's names, and the interest will be essentially tax free until their income exceeds the minimum income level. As the principal owner, however, you will remain liable for income taxes on the accumulated E-bond interest. Your best bet would appear to have the H-bonds reissued in your children's names -- possibly over several years to avoid a peak income tax. After that, the annual H-bond interest will go directly to your children with little or no tax.

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