Because the interest generated on your inherited bonds is considered income, it must be reported and taxed. Interest that is deemed “income in respect of a decedent” and interest that is considered your income are separated by the Internal Revenue Service. Income in respect of a decedent is income earned on bonds up until the original owner’s death but not yet received, either because the bonds were not redeemed or because they had not yet matured. After this day, everything you make becomes your income.
What are my options for avoiding paying taxes on inherited savings bonds?
If you inherit the bonds, you may have a different option. The bonds can be redeemed by the executor of the deceased’s estate, who will then have them reissued to you after paying the estate’s taxes on the interest. You can avoid paying tax on interest earned during the decedent’s lifetime by doing so.
Savings bonds are assets that are not subject to probate. If no survivor is specified, or if that individual has died, the bond becomes an asset of the estate, which complicates things and makes distribution more time consuming.
Yes. Cashed bonds are reported on IRS Form 1099-INT. When you cash your bond or after the end of the tax year, the form may be available.
Do I have to pay taxes on inherited savings bonds, though? Inheritance from a Decedent’s Estate
Because the interest generated on your inherited bonds is considered income, it must be reported and taxed. The IRS draws a boundary between interest that is considered “income in respect of a decedent” and interest that is considered “your income.”
If the interest wasn’t included in the decedent’s income and estate, you’ll have to pay tax on it when you cash out the bond. When the bond is cashed out, any interest that accrue after the decedent dies is always included in your income.
Do those who receive savings bonds have to pay taxes on them? The law typically states that savings bonds should be transferred to the bond’s beneficiary after death. If the decedent already paid taxes on the accumulated interest, the earnings on inherited savings bonds are not taxable to the heirs, but the heirs are accountable for any unpaid taxes.
Are inherited bonds subject to taxation?
Owners of savings bonds can postpone paying taxes on accumulated interest until the bond is cashed in. After someone dies, the law generally states that savings bonds should be transferred to the bond’s beneficiary. The decedent’s and her estate’s treatment of the cumulative interest determines how the bond is finally taxed. If the decedent already paid taxes on the accumulated interest, the earnings on inherited savings bonds are not taxable to the heirs, but the heirs are accountable for any unpaid taxes.
What should you do if you receive an inheritance of savings bonds?
- Don’t do anything. Until the bond matures, it will continue to receive interest. Our office will hold semi-annual interest payments and pay them when the bond is cashed.
- Reissue: Have the bond reissued in the name of the survivor. A coowner or beneficiary may be added to the bond by the new owner.
- Along with FS Form 5396, submit a certified copy of the owner’s death certificate (download or order). Although the bond will not be physically reissued, you will continue to receive semi-annual interest payments. (A death certificate or other legal evidence will not be returned.)
Cash (Redeem) a paper bond with a named survivor
Series EE and I: Take your savings bonds to a financial institution that accepts them and provide proper identification as well as any supporting documentation that may be necessary. It’s a good idea to phone the banking institution ahead of time to find out what kind of identification and documents you’ll need.
Your local bank is not permitted to cash Series HH bonds, but they can assist you in submitting your transaction.
HH Savings Bonds (Cashing Series)
Reissuing a paper bond with a survivor named on it
Paper reissues of Series EE and Series I bonds are no longer available. Instead, TreasuryDirect converts the bonds to electronic bonds. If you are the survivor, you can use SmartExchange to convert your bond.
Series HH: Paper reissues of these bonds are still available. Reissuing or Replacing Series HH Savings Bonds has instructions.
Is there a stepped-up basis for inherited savings bonds?
The cost basis of your inherited bonds is “stepped up” to the fair market value on the day of the deceased’s death. The initial cost basis is the sum paid for the bonds by the deceased. The stepped-up value is your cost basis. Because you don’t have to pay taxes on any gains made before the deceased’s death, the step-up reduces your capital gains tax when the inherited assets have appreciated in value. Your capital gains tax should be small if you sell the bonds right away. No matter how quickly you sell the bonds, they all qualify for long-term capital gains rates.
Is it possible to cash in my parents’ savings bonds?
If you are now the owner of the savings bonds or if your parent listed you as the survivor beneficiary on the bonds, take them to a bank or other financial institution. In the presence of a bank official, fill out the redemption form on the back of the bonds and sign it. A driver’s license or other form of identification is required. You must also provide proof of death if you are mentioned as a survivor. This is usually done by a verified copy of the death certificate. The bank will redeem the bonds and pay you the proceeds.
How much will my savings bonds be taxed?
When you must pay taxes on Treasury-issued savings bonds is usually determined by the type of bond and the length of time you hold it. You have two choices from the Treasury:
- Defer reporting interest until you redeem the bonds, give up ownership of the bonds, and they are reissued, or the bond has matured and no longer earns interest.
It’s common practice, according to the Treasury Department, to withhold reporting interest until bonds are redeemed at maturity. The redemption process is automated with electronic Series EE bonds, and interest is reported to the IRS. The IRS Form 1099-INT is used to record bond interest earnings.
It’s vital to remember that interest on savings bonds is taxed in multiple ways. The interest gained on savings bonds is liable to federal income tax and federal gift tax if you redeem them with the interest earned. Interest earnings are not subject to state or local income taxes, but you may be subject to state or estate taxes depending on where you live.
What are the tax implications of inheriting municipal bonds?
If the investments you inherited pay dividends or interest, you’ll get that money once you’ve formally taken ownership of them. Municipal bonds are free from federal income tax if you inherited them.
Is income from a deceased person taxable?
Untaxed income that a decedent earned or had a right to receive during their lifetime is referred to as income in respect of a decedent (IRD). The decedent’s IRD is taxed as if he or she were still alive. In most cases, beneficiaries are liable for paying taxes on IRD income.
Is it possible to inherit bonds?
If the savings bonds were jointly owned or if the owner specified a payable-on-death (POD) beneficiary to inherit them, they can be transferred to new owners without going through probate. Only sole owners can choose a POD beneficiary; these bonds can be jointly owned or registered in POD form, but not both.