The IRS would likely treat the two transactions as one under the "step doctrine" and not treat this as a gift, although there could be an issue if the payment happened in the subsequent year.

My concern is more in the cases where the FlyerTalker is in fact paying for the bonds.

Of course, keep in mind that even if there IS a gift tax consequence, that consequence is not a currently due tax but rather a using up of one's lifetime estate tax exclusion, currently $1,000,000. Any gift over $11,000 (or $22,000 if gift splitting is elected) would reduce the available exclusion (by the excess, not the entire amount).

Now a good trick if you have minor children is to elect to include the accrued, unpaid interest in their taxable income on a yearly basis (instead of deferring tax until you cash the bonds). The first $750 in interest per kid per year will be tax free and the next $750 will be taxed at the kid's rate of 10% (all this assumes the minor child has no other investment income and limited earned income). In the year the kid turns 14 and thereafter, the first $750 is tax free and ALL the rest gets taxed at the kid's rate (10% on the next $6,000).

You might not want to do this if you think you will eventually be able to exclude the interest by using it to pay higher education expenses, but that particular tax break phases out at pretty low income levels.

Doakes

I'm in awe! Reading these posts, it's like I'm back in my MBA program of years ago. What a great group of folks we've got here- don't mean too sound too much like a cheerleader, but this is really cool - go team!

Thanks, JoeDoakes.

I haven't bought any bonds for miles yet; however, I've been plotting how best to do this to maximize my miles/interest, etc. I have six kids. I ought to be able to have some fun with this.

How are co-ownership bonds treated since the recipient is unknown until cashed in.

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DtG

the bank reports the interest to the account holder who deposits the bonds for payment (at least that's what my bank does).

I believe that the gift is considered to occur at the time the bond is cashed. Assuming this is correct, you don't want to cash in more than $11k (or $22k) of bonds per child in a given calendar year. I'd be surprised if any computer system tracks this, but if you do something inconvenient like die and then get audited, a mistake could get expensive.