Understanding Inherited Savings Bonds | Altman & Associates (2024)

FAQs

How do I avoid paying taxes on inherited savings bonds? ›

The Education Tax Exclusion

The IRS lets you avoid paying taxes on interest earned by Series EE and Series I savings bonds when you redeem them if you use the money toward qualified higher education costs for yourself, your spouse, or any of your dependents.

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.

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).

A savings bond can be redeemed at some banks with proper identification and supporting documents. If the bond is reissued, it will be reissued as an electronic bond. If there was one owner on the bond and that person is dead, the savings bond becomes part of the owner'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.

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.

If a U.S. savings bond is issued in the names of co-owners, such as the taxpayer and a child, or the taxpayer and spouse, then the bond's interest is generally taxable to the co-owner who purchased the bond.

Do the address and Social Security Number on the bonds have to match the customer's address and Social Security Number? Not necessarily. The customer may have moved or the bonds may have been a gift and contain the purchaser's information.

If you're cashing in a paper savings bond of $1,000 or less, you'll need FS Form 1522 and a copy of your driver's license, passport, state ID or military ID. If the bond amount is more than $1,000, you must have your signature certified by a notary or certifying officer.

Do you pay taxes when you cash in savings bonds? ›

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.

Savings bonds can generally be redeemed with the bank where you have a checking account. For example, at Bank of America, customers who have had a checking or savings account open for at least six months can easily cash in their savings bonds.

You can cash in (redeem) your EE bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.

There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value.

For most individual investors, CDs can play a useful role as a very low-risk part of a fixed-income portfolio or a place to park cash while earning a bit of interest. Bonds are more complex but can offer higher yields for those willing to take on a bit more risk.

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.

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.

The increase in value of the stock, from the time the decedent purchased it until their death, does not get taxed. Therefore, the beneficiaries of the stock will only be liable for income on capital gains earned during their own lifetimes; that income will be taxed at the long-term capital gains rate.