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The interest on the EE bonds can accumulate until the total has reached $750 and then the child files a tax return claiming all the interest from the previous years on the tax return for that year and indicating that the return is for the purpose of reporting bond interest annually. Right?


Not exactly. You don't accumulate interest from year to year. You look at each year one at a time. The interest from that year is reported on the child's return -- just like yours. If the interest, along with any other unearned income, is less than $750 then no tax is due on that year's return.


Actually, you can accumulate interest from year to year when you invest in EE bonds. See IRS Pub. 550 for details. This is particularly beneficial when you intend to redeem the bonds and use the proceeds for educational expenses. In this case, the accrued interest is excluded from income.

It is also possible to switch from accrual to annual recognition by recognizing all of the to-date accrued interest in the year of switch.

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