I have paper EE savings bonds purchased in 1992 which have been accumulating interest every year. The original purchase price was $35,000 and the total accumulated interest through 2012 is roughly $64, 500. I use Method 1 for accruing interest, so I have never reported or paid interest on these bonds. They will continue to earn interest at a rate of 4% until their final maturity date of 2022, at which point I will have to pay tax on all the accumulated interest at that time.
Instead of waiting until 2022 to pay this interest, I have decided to change from method 1 to method 2 for tax year 2012 and pay tax on the $64,500 in interest that has accumulated to date. The reason I am doing this is because I also have a very large loss on my 2012 income tax which will nicely offset the income from all of this accumulated interest. I realize I will now have to report annual interest on these bonds until I cash them in (presumably in 2022, when they will stop earning interest).
How do I word this accrual method change on my 2012 return? Do I say something like "Accumulated interest on savings bonds for 1992 through 2012 to reflect change from Method 1 to Method 2" on schedule B? Do I need to include any other attachments or documentation? I use a software product acquired from the government called "Savings Bond Wizard" to calculate and track the interest expense on these bonds, so I should be able to calculate exact values for the accrued interest.
Also, when I finally cash in the bonds in 2022, I presume I will receive a
1099 that will show all the interest that would have accumulated to that point if I hadn't changed methods in 2012. Do I need any special wording on my 2022 return to explain that the 1099 for that final cashing in on the bonds is incorrect?