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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
Inheriting I Bonds
Do I have to pay taxes on an inherited I bond? ›
As a result, when inheritors redeem inherited bonds on which the tax has been deferred, they will owe tax on all the interest that has accumulated.
What to do if you inherited savings bonds? ›
Once you have claimed the inherited savings bonds, you can choose to cash them in or hold onto them for future use. If you decide to cash them in, you will need to pay taxes on the interest earned on the bonds.
Who pays taxes on gifted EE bonds? ›
The interest income of the savings bond will be taxed to the bond's owner—i.e., the recipient of the gift—when the bond matures and is redeemed for cash (or the owner will be taxed each year if they elect to report the interest income annually).
How to avoid paying taxes on EE savings 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.
What happens to EE savings bonds when the owner dies? ›
A survivor is named on the bond(s)
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. If only one person is named on the bond and that person has died, the bond belongs to that person's estate.
How much tax will I pay on my 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.
Is there a step up in basis on 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.
How are I bonds taxed? ›
Interest on I bonds is exempt from state and local taxes but taxed at the federal level at ordinary income-tax rates.
Can you change beneficiaries on I bonds? ›
In your TreasuryDirect account, you can: add another person as secondary owner. add or remove a beneficiary. name a new owner instead of a current living owner.
Using the money for higher education may keep you from paying federal income tax on your savings bond interest.
Why did I get a 1099 for inheritance? ›
This means that when the beneficiary withdraws those monies from the accounts, the beneficiary will receive a 1099 from the company administering the plan and must report that income on their income tax return (and must pay income taxes on the sum).
Do you get a 1099 when you cash in savings bonds? ›
At a bank: If a bank cashes your savings bond, they are responsible for getting you a 1099-INT. They may give or mail you the 1099-INT as soon as you cash the bond or they may wait until the following January.
Do you have to pay taxes on savings bonds you inherit? ›
The short answer is yes, you generally will be responsible for taxes owed on savings bonds you inherit from someone else. The good news is that you may be able to defer taxes on inherited savings bonds or avoid it altogether in certain situations.
Is a US EE savings bond is exempt from state and local taxes? ›
Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes.
Is there a penalty for not cashing in matured EE savings bonds? ›
While the Treasury will not penalize you for holding a U.S. Savings Bond past its date of maturity, the Internal Revenue Service will. Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity.
Do I have to pay taxes on money inherited? ›
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
Are bonds subject to inheritance tax? ›
Investment Bonds and trusts
Takes part of the investment bond out of the Estate immediately. You have to take an income and the rest of the investment becomes exempt to inheritance tax after 7 years. The investment bond falls out of the Estate as the loan is repaid, typically at 5% per annum.
Do I owe taxes on inherited investment account? ›
You will have to include the interest income from inherited cash and dividends on inherited stocks or mutual funds in your reported income. For example: Any gains when you sell inherited investments or property are generally taxable, but you can usually also claim losses on these sales.
Can you have a beneficiary on I bonds? ›
The title will pass directly to the co-owner when you die. They don't have to go through the probate process to cash out the bond. Beneficiary designation: You can designate a beneficiary of the I bond with the U.S. Treasury Department. It will bypass probate and transfer ownership to your beneficiary upon your death.
