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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).
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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? ›
Whoever does end up paying the income tax on a particular bond, whether it's the estate or the beneficiary, is entitled to a tax deduction for the portion of the Federal estate tax attributable to the interest on the inherited bonds. Please note that only estates in excess of $5,430,000 will pay any Federal estate tax.
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.
What to do with inherited series EE bonds? ›
TO CASH BONDS FOR A DECEDENT'S ESTATE:
Series EE, Series E, and Series I bonds can be cashed at a local financial institution. Some of these transactions may have to be forwarded for further processing.
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.
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.
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 do I avoid 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.
Do you pay taxes on matured EE bonds? ›
Here's an example of how Series EE bonds are taxed. Bonds issued in January 1990 reached final maturity after 30 years, in January of 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest was taxable in 2020.
Do you pay federal taxes on EE bonds when cashed? ›
The interest paid on savings bonds when they are redeemed is subject to federal taxation.
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.
How do I cash an inherited EE bond? ›
Get a certified copy of the death certificate for everyone who has died who is named on any of the bonds. Have each person who is entitled to a distributed bond also fill out and sign the appropriate forms: If they want cash for their bond: FS Form 1522. If it is an EE or I bond and they want to keep it: FS Form 4000.
Do I have to pay taxes on an inherited savings account? ›
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.
Is a US EE savings bond is exempt from state and local taxes? ›
16. How are savings bonds taxed? Savings bond interest is exempt from state and local income tax. Savings bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first.
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.
What happens to EE bonds after 30 years? ›
If you moved your EE bond into a TreasuryDirect account, we pay you for the bond as soon as it reaches 30 years and stops earning interest. If you still have a paper EE bond, check the issue date. If that date is more than 30 years ago, it is no longer increasing in value and you may want to cash it.
Does the beneficiary of an I bond pay taxes? ›
Inheriting I Bonds
The executor of the decedent's estate can choose to include all pre-death interest earned on the bonds on the decedent's final income tax return. If this is done, the beneficiary reports only post-death interest on Form 1040 when the bonds mature or are redeemed, whichever comes first.
Do you have to pay taxes on investments you inherit? ›
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.
Do you have to pay taxes on gifted I bonds? ›
Yes, you are required to pay federal income taxes on the interest earned by inherited series I savings bonds. The interest is taxed in the year it is earned and must be reported on the beneficiary's tax return.
Can you have a beneficiary on I bonds? ›
Series EE and I
Once in your TreasuryDirect account, the bond will be registered in your name alone. You can then add either a secondary owner or beneficiary. Once you have a TreasuryDirect account, you can convert other paper bonds you own to electronic bonds.
