I purchased a taxable zero coupon bond for my daughter under the UGMA/ NV and paid any interest since it just accrues. I never included it on my tax forms since I thought it was at my daughters tax rate and she had no income. The bond for $5,000 has since matured, and the IRS informed her that she owes taxes on the difference between the discounted price of the bond and the 5K redemption value. Would she have to pay interest at her current rate since she is now gainfully employed, or at the rate for the years the interest was posted since she had no income for the first seventeen years of the bond? Thanks
zero coupon bond UGMA interest
Mar 19, 2011
1 Replies
Each year when she received the Form 1099-OID she should have reported the OID as interest income.
And she should have increased her cost basis by the amount of OID.
If she had too little income to file, she did not need to file.
Note had this been a US Savings Bond, and she wished to confirm she elected to defer reporting the annual interest, she could have filed her first tax return reporting the Savings bond interet.
But with this OID and noitbeing a US avingsbond, there is no election to be made and no need to file if not suficient interest.
If she bought the OID bond as an IPO and held until redemption at maturity, the amount of annual OID increases to basis should have made her basis equal to redemption price. She still needs to file schedule D to report the redemoption and to show the adjusted basis. Gain will be zero or very slight.
If she never reported the interest and she had a filing requirement, it's not too late to file and if necessary, to amend.
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