Understanding Inherited Savings Bonds | Altman & Associates (2024)

Along with other retirement accounts and life insurance, savings bonds are oftenconsidered “non-probate assets,” meaning that they are not typically bequeathed in accordance with a person’s will. Instead,many times,they are “payable upon death” to the person(s) (or entity, such as a trust) that had been designated as the co-owner or beneficiary. (This is why keeping beneficiary designations current is highly critical! Leave your ex-spouse in the beneficiary box and, well, it belongs to them regardless of how the remainder of your assets have been appropriated!)

Things become more complicated when no survivor is named or that person has passed away. In that case, the bond becomes an asset of the estate and distribution can take months or even years.

Inheriting Savings Bonds

If you inherit a savings bond, the first step is to determine the value and interest being earned (if any). Bonds first started being issued electronically in 2002, allowing owners to check the value of the holdings online. To check the value of older bonds, you can visit the U.S. Department of the Treasury’sSavings Bond Calculator.

Once you have determined the value, interest rate and maturity date, you have the option to either cash it out or have it reissued in your name. Before making this decision, it’s important to understand the administrative requirements and the income tax considerations.

  • It, of course, makes sense to cash out bonds that have matured and therefore stopped earning interest.
  • If the bond is still accruing interest, however, it may make sense to hold onto it. Depending on the type of bond and when it was issued, the interest rate could be significantly higher than that other of other low-risk investments like Treasury bills, CODs, and money market funds.
  • Most people choose to defer or delay paying income tax on the interest earned by their savings bonds. [the other choice is to pay the income tax on the interest each year, even though the interest is not received until the bond is redeemed]. As a result, when inheritors redeem inherited bonds on which the tax has been deferred, they will owe tax on all the interest that has accumulated.
  • If you choose to have a bond reissued, you have the option of paying tax on the interest accumulated up until the original bondholder's date of death, and then either accruing or deferring any subsequent tax.
  • Another option is that the interest accumulated up until the original bondholder’s date of death can be reported on the original bondholder’s final income tax return. In some situations, that can actually reduce the income tax burden, though it may be paid by someone other than the person receiving the bond.
  • If there is no named beneficiary of the bond, then it will be distributed according to the bondholder’s estate and Will. Then, if you decide on having the bond reissued prior to the settling of the estate, it is possible to have the tax on the accumulated interest paid directly by the estate, rather than coming out of your own pocket.
  • 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.
  • If you choose to have the bond reissued and then defer future tax, it is important to maintain records of what income tax has already been paid. Otherwise, years from now when the bond matures or is redeemed, you or your beneficiaries could wind up paying too much in taxes.

How to Avoid Paying Taxes on 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.

To discuss making updates to your beneficiary designations, or for help with an inherited non-probate asset, please contact .

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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.

How do I cash out an inherited savings bond? ›

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).

What to do with deceased parents' savings bonds? ›

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.

What happens when you inherit bonds? ›

If the bonds are redeemed in the same tax year that they are inherited, the beneficiary may owe income tax on the interest earned. If the bonds are held until maturity, the beneficiary will owe income tax on the interest earned at that time.

Who pays the tax on inherited savings bonds? ›

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.

Can I cash my deceased parents' savings bonds? ›

Sometimes, the beneficiary is designated on the savings bond. The bond will then go to the beneficiary when the bond owner dies. The U.S. Treasury Department will require a certified death certificate and other documentation so that the beneficiary may claim the bond.

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 is the cost basis of an inherited bond? ›

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.

What documents do I need to cash a savings bond? ›

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.

Does it matter whose social security number is on a savings 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.

What banks will cash savings bonds? ›

Wells Fargo and Truist are two banks that will do this, provided that the bonds total less than $1,000 and you bring proper documentation.

How do I change the ownership of a savings bond? ›

Fill out and send us FS Form 4000 and the bonds. In your TreasuryDirect account, you can: add another person as secondary owner. add or remove a beneficiary.

Do I pay taxes on inherited savings bonds? ›

The short answer is yes, you generally will be responsible for taxes owed on savings bonds you inherit from someone else. The good news is that you may be able to defer taxes on inherited savings bonds or avoid it altogether in certain situations.

Do you pay taxes on EE bonds? ›

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.

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.

Do you have to pay taxes on savings bonds you inherit? ›

The short answer is yes, you generally will be responsible for taxes owed on savings bonds you inherit from someone else. The good news is that you may be able to defer taxes on inherited savings bonds or avoid it altogether in certain situations.

What should you do after inheriting $70,000 in savings bonds? ›

Another thing to note: Savings bonds don't get a step-up in basis at death the way stocks or other investments do. That means you have to pay tax on the full amount of interest due on the bonds as the inheritor. Cashing them all in now and dealing with the tax is probably a good way to go.

Does the beneficiary of an I bond pay taxes? ›

But if the executor doesn't include the interest earned up until the date of death on the final tax return, the beneficiary will have to pay taxes on all the interest earned when the bond is redeemed or matures, whichever happens first.

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