Declaring taxes by minors on savings bonds saves at cash-in time

Many parents have been using the popular 529 Plan to set money aside to pay for their childrens' college education. However, I know some parents who are not too happy about their money being tied up in a 529 plan now that it has come time for them to pay the actual tuition. With the stock market down almost 50% from its high in October 2007, it's likely your 529 Plan has been taking hits with no end in sight.

On the flip side, owners of U.S. Savings Bonds have experienced only increases in value no matter how much the market has fluctuated over the past months or year. In fact, some Savings Bond owners are holding bonds earning as much as 8.52% annually in tax-deferred investments.

But what about the tax breaks you get from a 529 Plan? That rule should help them out perform the savings bonds even in such a turbulent market, right?... Wrong...

Even long-time owners of U S Savings Bonds may not know this helpful tip about the bonds owned by their children.

If your child's name is listed as the primary owner on a savings bond, you can report the interest earned by the bond during the prior year, every year, instead of deferring it until they need it cashed in. It's all right there in IRS publication 550! Unfortunately, nobody except auditors and tax-law junkies really reads those kinds of publications to find out these rules.

Simplified, the rule states that the reportable earnings of a minor is exempt from paying income taxes on those earnings if they are less than $850 per year. This amount usually changes each year. Therefore, the responsibility to report the interest income earned by the savings bond has been satisfied, and there are no taxes due -- if the taxable amount due is less than $850.

Just so long as you continue to keep a written record of the yearly interest you are paying -- for all of the savings bonds -- the bonds will not have any tax liability upon cash-in.

And there is even another plus! Once your child elects to report the increase in the value of every bond, every year, the child doesn't even have to file a federal income tax return. The only requirement is that the only income being reported on the child income tax return is interest income generated from U.S. Savings Bonds.

Savings bonds continue to be one of the better methods to build a dependable, safe and secure source of moneys that are immune from the expenses and gyrations of 529 plans and the stock market in general.

Jack Quinn is a personal finance writer and editor for SavingsBonds.com.