How are Inherited EE or I Savings Bonds Taxed? Kiplinger Tax Letter (2024)

FAQs

How are Inherited EE or I Savings Bonds Taxed? Kiplinger Tax Letter? ›

Inheriting I Bonds

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.

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.

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).

You are the original owner.

You no longer own it. If you have not been paying tax on the bond's interest every year, you now owe tax on all the interest the bond earned while you owned it. You will not owe tax on interest the bond earns for the new owner.

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.

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.

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.

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.

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.

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.

Using the money for higher education may keep you from paying federal income tax on your savings bond interest.

Is interest income from I bonds taxed as capital gains? No, the interest income earned from I bonds is not considered a capital gain and is therefore taxed differently. Instead, it is taxed as regular income at the federal level and exempt from state and local taxes.

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.

By default, your secondary owner or beneficiary doesn't pay any taxes when they continue to hold the I Bonds they inherit from you. I Bonds aren't eligible for a step-up in basis . They'll pay federal taxes on the untaxed interest since your original purchase when they cash out or when the bonds mature.

If you cash a paper savings bond by mailing it to Treasury Retail Securities Services, we mail you a 1099 by January 31 of the following year. (You can call us for a duplicate statement, if needed, beginning February 15.)

If the beneficiary has a TreasuryDirect account, the security will be transferred to that account. If the beneficiary does not have an account, he or she may establish an account. Alternatively, a beneficiary named on a savings bond may request redemption.

Here's how they are typically handled: On Death of the Policyholder: The value of the bond is included in the estate and subject to IHT if the total estate exceeds the nil-rate band. This means that beneficiaries may have to pay inheritance tax on the value of the bond.

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.

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.