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Premium Bond winnings and US Tax

Premium Bond winnings and US Tax

Old Mar 24th 2014, 8:37 pm
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Default Premium Bond winnings and US Tax

What is the tax situation for a USC living in the UK as far as premium bonds winnings?

This old thread didn't seem to be very conclusive.
http://britishexpats.com/forum/showthread.php?t=309717

My thoughts are that the winnings would be treated as bank interest since the tax free income from cash ISA's are taxed in the USA as interest. However, since it is a form of prize-linked savings would the IRS treat the winnings as gambling, even though it is not really gambling since you can never lose your stake money?

It was so successful when tried in one State in the USA that the government shut it down after initially approving it. The reason being that it re-directed too much money away from the State lottery.

http://en.wikipedia.org/wiki/Prize-L...avings_Account

http://freakonomics.com/2012/04/26/l...radio-podcast/
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Old Mar 24th 2014, 11:19 pm
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Default Re: Premium Bond winnings and US Tax

I have no idea, sorry, but I'm wondering if this might get more responses if it was posted in the USA section?
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Old Mar 24th 2014, 11:54 pm
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Default Re: Premium Bond winnings and US Tax

Originally Posted by Dashie View Post
I have no idea, sorry, but I'm wondering if this might get more responses if it was posted in the USA section?
Good idea, I'll ask the Moderators if they will move it.
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Old Mar 25th 2014, 12:38 am
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Default Re: Premium Bond winnings and US Tax

Originally Posted by durham_lad View Post
What is the tax situation for a USC living in the UK as far as premium bonds winnings? ....
If I ever win, with my £15 of bonds, it's going down as interest on foreign government securities, because that's what a premium bond is.
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Old Mar 25th 2014, 12:58 am
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Default Re: Premium Bond winnings and US Tax

Gambling winnings should be declared on line 21 of form 1040 (other income). Since the Premium Bonds operate as a de-facto lottery where only the interest (rather than the capital) is at stake, this seems to be the best fit. It's not clear why anyone would want to declare this kind of income as interest instead.

http://www.irs.gov/uac/Gambling-Winn...Taxable-Income
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Old Mar 25th 2014, 1:41 am
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Default Re: Premium Bond winnings and US Tax

Originally Posted by JAJ View Post
Gambling winnings should be declared on line 21 of form 1040 (other income). Since the Premium Bonds operate as a de-facto lottery where only the interest (rather than the capital) is at stake, this seems to be the best fit. It's not clear why anyone would want to declare this kind of income as interest instead. ...
Because (i) it is a bond, (ii) the aggregate value of winnings is a function of the outstanding value of bonds and the prevailing interest rate on government bonds, and (iii) there is no capital at stake (yes, I get the point about interest being the stake, but whichever way you slice and dice it, a premium bond is a polygonal peg being driven into a round hole).
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Old Mar 25th 2014, 2:31 am
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Default Re: Premium Bond winnings and US Tax

Originally Posted by Pulaski View Post
Because (i) it is a bond, (ii) the aggregate value of winnings is a function of the outstanding value of bonds and the prevailing interest rate on government bonds, and (iii) there is no capital at stake (yes, I get the point about interest being the stake, but whichever way you slice and dice it, a premium bond is a polygonal peg being driven into a round hole).
Those were my thoughts as well. Normally with gambling, you would offset losses against winnings each year, but how would you calculate lost interest.

DW had an uncle die recently and in his estate is £22k worth of premium bonds which are pretty much 100% certain to be returning prizes most years, although obviously not "the big one" from the size of the estate.
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Old Mar 25th 2014, 2:42 am
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Default Re: Premium Bond winnings and US Tax

Originally Posted by durham_lad View Post
..... DW had an uncle die recently and in his estate is £22k worth of premium bonds which are pretty much 100% certain to be returning prizes most years, although obviously not "the big one" from the size of the estate.
If I remember correctly, premium bonds can't be transferred, on death or otherwise, they have to be redeemed. If DW wants premium bonds she'll have to repurchase newly issued ones using her inheritance.
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Old Mar 25th 2014, 3:29 am
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Default Re: Premium Bond winnings and US Tax

Originally Posted by Pulaski View Post
If I remember correctly, premium bonds can't be transferred, on death or otherwise, they have to be redeemed. If DW wants premium bonds she'll have to repurchase newly issued ones using her inheritance.
Oh yes, understood, it was just the fact that he had them got me to thinking about the IRS tax implications for USC's owning them. I'm sure the lawyer will be cashing them in before dividing up the estate 7 ways.
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