US Savings Bonds

Posts Tagged ‘divorce’

Negotiate the interest reporting of US Savings Bonds before the completion of divorce settlement

Many divorce settlements cost divorcees a lot of unnecessary tax dollars because they fail to negotiated the interest on the US Savings Bonds properly. In many cases, the parties responsible for paying taxes on the US Savings Bonds they no longer have are not even aware that they have to pay taxes on the Us Savings Bonds.

If you are awarded US Savings Bonds in your divorce decree

If you are awarded US sayings bonds in your divorce decree as part of your divorce settlement, be sure to watch out for the followings.

The accrued interest on the US Savings Bonds that have not been reported as income up to the time of divorce

If half of the US Savings Bonds are in your former spouse’ s name first with you as the co owner of the US Savings Bonds and the other half of the US Savings Bonds are in your former spouse’s name alone.

Removing your former spouse ’s name from the US Savings Bonds

When you receive the Us Savings Bonds, change the Us Savings Bonds title to your name, removing your former spouse’ s name from the Us Savings Bonds altogether.

Claim principal ownership

Then you claim that you were the principal co owner of the Us Savings Bonds even though you were named second on the Us Savings Bonds title and the Us Savings Bonds were retitled without a taxable event.

Taxation of Us Savings Bonds in divorce

The Us Savings Bonds that were in your former spouse’s name alone were retitled to your name and a 1099-INT was issued to your former spouse for all the interest earned on those Us Savings Bonds up to the point of the 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.

If you are going through a divorce and either you or your spouse have US Savings Bonds in divorce dispute, there are some areas about US Savings Bonds in divorce cases that you should be aware of. Discussion of US Savings Bonds in divorce cases needs to be prior to settlement so that financial divorce settlements can include US Savings Bonds.

US savings bond values – use current value not face value

In order to include US Savings Bonds in divorce cases in the divorce settlement asset pool, the US Savings Bonds values need to be determined. A current value of the US Savings Bonds should be used for the US Savings Bonds values. The face value of the US savings bond or the purchase value of the US savings bond should not be used as the US savings bond values in divorce cases.

What are the current US savings bond values?

The current US savings bond values are the values of the US Savings Bonds if they were cashed in today. In another word, the amount of money the US savings bond owner would receive from his or her US Savings Bonds if they were cashed in today.

Receiving Us Savings Bonds in a divorce settlement

If you are receiving Us Savings Bonds as part of your divorce settlement, and you are named first on the Us Savings Bonds, you may also want to have the Us Savings Bonds titled changed to your name alone or with a co-owner or beneficiary. Having Us Savings Bonds re-titled in a divorce settlement is not a taxable event and you will not be taxed. The divorce decree should specify exactly which Us Savings Bonds go to which spouse.

Interests on the Us Savings Bonds

When negotiating the divorce settlement, note that it is likely that the interest of the Us Savings Bonds have not been reported as income. Interest on Us Savings Bonds are often deferred. This means, if the Us Savings Bonds were cashed and you have to pay taxes then the after tax value of the US savings bonds from your divorce settlement can be substantially less than the redemption US Savings Bonds Value. If you are stuck in this situation having to pay taxes on US Savings Bonds Interest, there are ways to avoid this.