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If you’ve inherited EE or I savings bonds that haven’t yet reached maturity, the federal tax rules can be complicated.
Most people who own EE or I bonds opt to defer reporting the interest as income for federal tax purposes until the earlier of the year the bonds mature or when they’re cashed in. So if you inherit EE or I bonds that haven’t yet matured, who is taxed on the predeath accrued interest?
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It depends on how that predeath interest is treated on the decedent’s final income tax return.
If the executor elects to include all predeath interest on that final return, then the beneficiary reports post-death interest on Form 1040 when the bonds mature or are cashed in, whichever comes first.
If the executor doesn’t include predeath interest on the decedent’s final return, then the beneficiary owes federal income tax on all pre- and post-death interest on the earlier of the bond’s maturity or redemption.
The Tax Court recently addressed this exact set of facts. In the case, a man who inherited a savings bond from his dad had it reissued in his name and later redeemed it. Treasury Direct sent him a Form 1099-INT reporting interest that accrued from the date his dad bought the bond.
But the son reported on his 1040 only the amount of interest that accrued from when the bond was reissued in his name until he cashed it in. That’s wrong. The dad never reported interest earned on the bond during his lifetime, and no election was made by his executor to include all the interest on the dad’s final Form 1040 when he died (Hitchman, TC Summ. Op. 2023-18).
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business taxes and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
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FAQs
It depends on how that predeath interest is treated on the decedent's final income tax return. If the executor elects to include all predeath interest on that final return, then the beneficiary reports post-death interest on Form 1040 when the bonds mature or are cashed in, whichever comes first.
How are I bonds taxed when inherited? ›
You report the interest that accumulated on the bond during the bondholder's lifetime on their final tax return. The estate would be responsible for paying any tax due and going forward, you'd owe tax on any interest that continues to accrue on reissued bonds.
Are Series EE or I savings bonds taxable? ›
The tax situation is the same for both EE and I bonds. For federal income tax, you choose whether to report earnings each year or wait to report all the earnings when the bond finishes earning interest (or when you cash it if you cash it before the end of its 30 year life).
What happens to EE savings bonds when the owner dies? ›
Just as with a single or sole owner, only the owner — in this case, the person named first — gets the interest, may cash in the bond, may make other changes. However, if the owner dies, instead of the bond going into the person's estate, the beneficiary automatically becomes the single or sole owner.
What happens when you inherit a bond? ›
If a surviving co-owner or beneficiary is named on the savings bond, the bond goes directly to that person. It does not become part of the estate of the person who died. If you are the named co-owner or beneficiary who inherits the bond, you have different options for paper EE or I bonds and paper HH bonds.
How are inherited securities taxed? ›
The person inheriting the stock only owes taxes on the change in stock price between when it was inherited and when it was sold. These taxes are charged at the long-term capital gains rate.
How to cash inherited US savings bonds? ›
If the bonds cannot be cashed at a local bank, the legal representative of the estate must complete a Special Form of Request for Payment of United States Savings and Retirement Securities Where Use of a Detached Request Is Authorized (FS Form 1522).
How do I avoid taxes on EE savings bonds? ›
Use the Education Exclusion
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent.
Do I need to report I bonds on my tax return? ›
I cashed some Series E, Series EE, and Series I savings bonds. How do I report the interest? In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.
How are EE bonds taxed when redeemed? ›
Key Takeaways. Interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. The interest that savings bonds earn is the amount that a bond can be redeemed for above its face value or original purchase price.
Depending on the interest rate of your bond and your own financial needs, it's generally beneficial to wait until full maturity to redeem them.
What is the cost basis of inherited bonds? ›
For inherited bonds, the cost basis is generally the market value of the bonds at the date of the original owner's death, known as the “step-up in basis.”6 This can significantly differ from the deceased's original purchase price.
Will EE savings bond be completely tax free if you use the proceeds to pay for? ›
Using the money for higher education may keep you from paying federal income tax on your savings bond interest. See the possibilities and restrictions for using savings bonds for education.
Do I pay taxes on inherited EE bonds? ›
Another thing to note: Savings bonds don't get a step-up in basis at death the way stocks or other investments do. That means you have to pay tax on the full amount of interest due on the bonds as the inheritor.
What is the federal tax rate on EE savings bonds? ›
The interest on EE bonds isn't taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn't made so bond holders receive the benefits of tax deferral.
Do I have to pay taxes on an inherited savings account? ›
In most cases, an inheritance isn't subject to income taxes. The assets a loved one passes on in an investment or bank account aren't considered taxable income, nor is life insurance. However, you could pay income taxes on the assets in pre-tax accounts.
What happens to a TreasuryDirect account when the owner dies? ›
If the secondary owner has a TreasuryDirect account, the security will be transferred to that account. If the secondary owner does not have an account, he or she may establish an account. Alternatively, a secondary owner named on a savings bond may request redemption.
Do you have to pay taxes on gifted I bonds? ›
Gifting I Bonds you own
Giving away bonds you already own to someone else doesn't get you off the hook with the federal government for owing money on previously untaxed interest. If the bonds are reissued in the gift recipient's name, you're still taxed on all that interest in the year of the gift.
How to avoid taxes on I bonds? ›
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.
