HH bonds with deferred interest

[Bucky]

I have a client that has HH bonds that matured in 2021 and have deferred interest attached. She doesn't want to pay the tax on deferred interest in 2021 because the income would cause additional tax consequences along with medicare cost increases. Her income will be less in 2022. My question is does anyone have a clue what the penalty for waiting is and can she cash in the bonds in 2022 and pay the tax on the deferred interest. I think she would have to amend the 2021 because that is when the interest was to be taxed.

[RWG1950]

You can find Q&A info on the old HH savings bonds at TREASURYDIRECT.GOV. This Federal Reserve web-site (844 284-2676)
seems to say the deferred HH bond interest becomes taxable when you cash the bond or its maturity - whichever occurs first.
There may not be a penalty for delay in itself, but having taxable income in 2021 and not reporting it until 2022 may become the issue.

[New York Enrolled Agent]

I have a client that has HH bonds that matured in 2021 and have deferred interest attached. She doesn't want to pay the tax on deferred interest in 2021 .

Knowing the facts as you know them, you have no choice - the deferred interest is reportable in 2021. I assume you reported the current interest earned each year and the deferral was from a conversion from E or EE bonds.

To give authority to the previous post, look at 31 CFR 352.7(g) [emphasis added]

Tax-deferred exchanges.

(1) Continuation of tax deferral. Pursuant to the provisions of the Internal Revenue Code of 1954, as amended, an owner who had not been reporting the interest on his or her Series E or EE bonds and savings notes on an accrual basis for Federal income tax purposes, and who exchanged those securities for Series HH bonds, was permitted to continue to defer reporting the interest on the securities exchanged until the taxable year in which the Series HH bonds received in the exchange reach final maturity, are redeemed, or are otherwise disposed of, whichever is earlier. A reissue transaction that affects any of the persons required to be named on the Series HH bonds, as set forth in paragraph (e) of this section, may result in termination of the tax deferral privilege.