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Is there any way to avoid paying income taxes on mature savings bonds?

August 31, 2011: 5:05 AM ET

My wife and I are drawing Social Security plus a pension from the company I retired from, which is enough income for us. We have Series E bonds that are maturing so we have to declare the interest on them. Is there any way we can roll these bonds over, so we do not have to declare the interest on our federal taxes as income? — L.B, Indiana

Are your bonds maturing or have they already matured? The last of the Series E savings bonds stopped paying interest in 2010. Granted, you may have not redeemed them yet. But according to IRS rules, this income should be accounted for in the year that the bonds matured. In other words, now is the time to cash those babies in and probably file an amended return for 2010 (assuming you've already filed for last year), says Tom Adams, author of Savings Bond Advisor. As painful as that tax hit may be, you're also currently giving Uncle Sam an interest-free loan.

Now, perhaps you're missing an "E" in your question, and have Series EE bonds that are maturing. Unfortunately, there's no way to roll these bonds over to avoid a tax hit. If you really don't need the money, you could consider cashing them in, making a charitable donation and getting a tax break on the gift. (Just be sure to talk to a tax pro before you do.) Or if you have kids with education expenses, you could see if you meet the myriad of hurdles necessary to use the proceeds tax-free for education costs. Then again you could just take the money, pay the taxes, and treat yourself and the Mrs. to something nice—a Mediterranean cruise sure sounds good.

-- Stephanie AuWerter

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