Changing from Method 1 to Method 2 on Savings Bond Interest

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?
Reply to
Rick
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There is noth On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Then follow these steps.

  1. Several lines above line 2, enter a subtotal of all interest listed on line 1.
  2. Below the subtotal enter ?U.S. Savings Bond Interest Previously Reported? and enter amounts previously reported or interest accrued before you received the bond.
  3. Subtract these amounts from the subtotal and enter the result on line 2.

Lastly, you state that you have a very large loss in 2012 that you can use to offset the interest income. I assume this is an ordinary loss and not a capital loss. Capital losses on Line 13 of the 1040 are limited to $3000.

Reply to
Alan

Yes, the 2012 loss is ordinary.

Thanks for the info!

Reply to
Rick

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