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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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