(3) What tax recommendation would you give this client that comes to you in March 2016? As of
this date, no returns for the family have been filed for 2015.
Vince and Sally Cruise are married and in October of 2014 their first child, John, was born. Shortly
after his birth, Sally’s parents gave John a fairly significant amount of United States Series EE savings
bonds. In 2014, the value of the bonds increased $600 and Vince and Sally did not report any of the
interest on a 2014 tax return for John which is permissible based on Example 63 of chapter 3 of your
textbook. In fact, no tax return was filed for John for 2014 since none was required under the
circumstances. The bonds are expected to increase in value by about $650-$1,050 each year for the
next 15 years starting in 2015.
Background: The increase in the value of the bonds each year is interest income under the OID rules
(see page 3-34 of your textbook). The standard deduction in 2015 is $1,050 for a child without any
earned income that is claimed as a dependent by someone else. Historically due to the inflation
adjustments this standard deduction has increased by $50 every three years. It is reasonable to expect
this amount will increase to $1,100 in 2018, $1,150 in 2021, $1,200 in 2024, $1,250 in 2027 and
$1,300 in 2030 due to inflation adjustments.