EE Savings Bonds interest from closed years?

[ICOUNT]

On Series EE bonds you report the interest in the earliest in the  year when the bonds mature or the year they are cashed in. So the bonds matured  years ago that are now closed years. The bonds are now cashed ----Is this interest non taxable because it relates to a closed year?

[Max W]

The interest is reported in the year they are cashed.  Client will receive a 1099-INT.

Interest is non-taxable to the state.

[bbstacker]

If the bonds final maturity date is in a closed year, based on the three year statute, the interest in effect becomes non-taxed.  As in any other inadvertent omission of income or error, the IRS has three years (generally) to audit the return.  The financial institution will issue Form 1099INT for the year the bonds are redeemed.  The reporting for the tax return will report the bond interest and also record an offset amount of interest equal to the interest amount for the prior year(s).

The reporting of prior year bond interest is not to report it on the current year tax return.  The publications refer to filing an amended tax return for the year(s) in question.   If the year(s) is/are closed, the IRS is barred from adjusting the closed year.

If the interest in question represents a 25% understatement of income then the statute is 6 years.  Depending on the circumstances it may be possible to exceed an understatement of 25% for the year(s) in question.

[Max W]

That's an interesting loophole.  When bonds mature, the interest is considered constructive receipt, so yes, the tax is due in the year of maturity, whether the bonds are cashed in or not.