US Savings Bonds in Divorce

Example 1: US savings bonds in both spouses' names

The US savings bonds in the divorce settlement are in one spouse' s name with the other spouse named on the US savings bonds as the co owner. Lets say, the US savings bonds are in the husband's name with the spouse as the co-owner of the US savings bonds. The divorce decree awards the US savings bonds to the wife. The wife can choose to say that:

• she was the principal co-owner (she will be responsible for the interest), or
• he is the principal co owner (he will be responsible for the interest).

If the wife chooses to say that she is the principal co owner then the US savings bonds will be re-titled to her without an immediate tax event. She can add any co owner or beneficiary whenever she wants and however she wants. She must be named on the retitled US savings bonds first to be able to name her co owner and beneficiary of US savings bonds. A copy of the divorce decree is needed to accompany the form to retitle the US savings bonds.

Double taxation of US savings bonds

When the person who has been named as co-owner or beneficiary of the US savings bonds cashes the US savings bonds, he or she will receive a 1099-INT for all the interest of the US savings bonds back to the date of purchase of the US savings bonds. The person cashing the US savings bonds can deduct the amount previously reported (under the other spouse' s social security number). If the person cashing the US savings bonds fails to deduct the amount previously reported, tax till have been paid twice on the same interest of the US savings bonds. This is double taxation of US savings bonds.

Example 2: US savings bonds in only one spouse' s name

The US savings bonds in the divorce settlement are in only one spouse 's name, say the husband's name. The divorce decree awards the US savings bonds to the wife. The wife should have the US savings bonds retitled as soon as possible. This is because, the US savings bonds were in the husband's name alone and the husband is considered the principal owner. Removing the principal owner of the US savings bonds will create a taxable event for the husband. The wife has to be named on the title of the US savings bonds. Then she can add any co owners of the US savings bonds and any beneficiaries of the US savings bonds.

The tax liability up tot he point of the divorce will be assigned to the husband. The 1099-INT will be issued to the husband. The US savings bonds will be retitled to the wife based on the divorce decree. Also avoid double taxation of the US savings bonds in this case.

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