If I gift I Bonds to my grandson, can he cash them? Who pays the tax?

By Karin Price Mueller | NJMoneyHelp.com for NJ.com

Q. If I gift I Bonds to my grandson, could he cash it out at anytime? Also do I pay taxes on it every year?

— Grams

A. I Bonds are a kind of U.S. Savings Bond, and they’re very popular these days.

The interest rates they pay are based in part on inflation, so you know those rates are attractive today.

Let’s go over some background.

When you buy a bond, you are lending money to the bond issuer, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

The issuer pays you a set rate of interest and then it returns your principal on the maturity date of the bond, he said. With savings bonds, you are lending money to the U.S. government.

He said traditionally, U.S. Savings Bonds were issued in paper form, but now they are also issued electronically.

“I Bonds protect you against inflation,” he said. “You are paid a fixed rate of interest, which is based on the prevailing rate of inflation. The interest rate is reset twice per year.”

The U.S. Government does not tax interest paid on state-issued or municipal bonds, and state governments do not tax interest on bonds issued by the federal government, Kiey said, so you do not pay state taxes on I Bonds, but you do pay federal income taxes.

You ask if your grandson could cash out the I Bonds that you gift him.

“The answer is yes, if you actually transferred the title of the bonds to him,” Kiely said. “If you keep the title in your name, then your grandson would not be able to cash the bond in.”

Interest payments would be sent to you under your Social Security number, so you would still have to pay the federal income tax, Kiely said.

Email your questions to Ask@NJMoneyHelp.com.

Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.