How to Report I-Bond Interest on Tax Return with Early Redemption Penalty

I've heard different advice from my accountant who said we should record all 12 months on the previous year return and then show a negative adjustment the following year. Something about how the 1099-INT would show the full amount but with an adjustment. Does the IRS publication specifically say which approach to use when you've elected annual reporting?

The specific guidance for annual interest reporting with early redemption is found in Publication 550 under the "U.S. Savings Bonds" section. When you elect to report interest annually, you report only the interest that you ultimately get to keep. If some interest is forfeited due to early redemption, that interest is treated as if it was never earned. Your accountant's approach would be more appropriate if you had chosen the default method of deferring interest until redemption. In that case, the 1099-INT would show the total interest minus the penalty, and you'd report that net amount in the year of redemption. But since you've elected annual reporting, you need to be consistent with that method.

Does taxr.ai work with the actual Treasury Direct statements? Mine look really confusing with all the different rates and adjustment periods. And did it give you specific instructions for filling out Schedule B or other tax forms?

I'm skeptical about using any automated tool for this. Did it explain WHY it's giving that advice? I'd want to know the tax code or publication section it's basing this on, not just the final numbers.

Yes, it works directly with Treasury Direct statements - just upload them and it identifies all the relevant information. The tool breaks down each interest period and rate, showing exactly how the calculations work. It specifically showed me how to complete Schedule B with the correct interest amount adjusted for the penalty. It actually cites the relevant tax code sections and IRS publications while explaining each calculation. For this I-Bond penalty situation, it referenced both Publication 550 and specific Treasury regulations to explain why the correct approach is to only report interest you ultimately receive. I found it extremely helpful for documenting my filing position.

How long did it actually take to get through to the IRS? My experience is they never answer tax law questions like this anymore, they just refer you to publications or a tax professional. Did you actually get a clear answer?

This seems sketchy. Why would I pay a service to call the IRS when I can call myself for free? And how do I know they're actually connecting me to the real IRS and not just some random person giving tax advice?

It took about 25 minutes from when I used Claimyr to when I was speaking with an IRS representative. They have a callback system where they call you when they reach an agent, so you don't have to sit on hold. The IRS representative was indeed willing to answer this specific question. They confirmed it falls under their guidance parameters since it involves straightforward reporting of interest income. I specifically asked about the annual election for I-Bond interest reporting with an early redemption penalty, and they provided a clear explanation. The service connects you directly to the official IRS phone line - you can verify this by checking the number on IRS.gov. They just handle the hold time and connection part for you. When the IRS agent comes on the line, you're speaking directly with them, not with anyone from the service.

Is that $1,200 threshold the same for 2024? My daughter's bonds will be right around that amount next year, so trying to figure out if we need to plan for potential tax liability.

For 2024, the threshold is actually $1,250 - it was adjusted for inflation. If your daughter's interest and other unearned income will be close to that amount, you might consider tax planning strategies like potentially moving some income to 2025 if possible. Remember that the kiddie tax only applies to unearned income (like interest), not to earned income from a job. So if your daughter has any employment income, that's handled differently and has its own standard deduction.

I used TurboTax last year with this exact situation. It doesn't handle it automatically - you need to manually enter the correct interest amount (only what you get to keep after the penalty) on Schedule B. TurboTax won't calculate the penalty for you or guide you through which interest months to include/exclude.