US Savings Bonds tax implications

US Savings Bonds Tax Implications

US Savings Bonds tax implications can be complex. If you inherited or were gifted US Savings Bonds and are unsure of the tax implications this post might be helpful.

The United States Treasury Department presently issues two different types of US Savings Bonds: Series I and Series EE that this post examines. There are also historical bonds like HH Bonds with a 20 year life that are no longer issued that will be briefly addressed as well.

Starting in 1935 the US Treasury offered many bond series, each with its own rates and terms. Some even funded special causes — for the Postal Service, the Armed Forces, and others.

Historical and Retired Bond Series include

The income tax implications for the estate of a decedent for Series I and Series E savings bonds can be complex.

Top Ten key points:

  1. If a surviving co-owner or beneficiary is named on the savings bond, the bond goes directly to that person and does not become part of the estate of the person who died
  2. If only one person is named on the bond and that person has died, or if two people are named on the bond and both have died, the bond belongs to the estate of the one who died last.
  3. 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.
  4. If you inherit EE or I bonds that haven’t yet matured, who is taxed on the predeath accrued interest depends on how that predeath interest is treated on the decedent’s final income tax return.
  5. 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.
  6. 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.
  7. Since the savings bonds are property of the estate, income in respect of a decedent is subject to the estate tax as part of the decedent’s gross estate.
  8. As a result, the estate can claim a federal estate tax deduction on any federal estate tax paid on the income.
  9. The estate would be responsible for paying any tax due and going forward, the beneficiary would owe tax on any interest that continues to accrue on reissued bonds.
  10. Having the estate pay the tax can reduce your personal tax burden.

Series EE Bonds

  • Generally interest on EE bonds is earned from the first month of ownership. 
  • The bond holder gets the interest all at once, generally when the bond is cashed in.
  • The bondholder may elect to EITHER:
    • report interest annually and pay income taxes annually on accrued interest.
    • defer reporting interest income and paying income tax on interest earned until the bond is cashed in. 
  • Most people put off reporting the interest until they actually get it (cash the bond in)
  • Form 1099-INT is issued for the year in which you get the interest. 
  • If a financial institution pays the bond, you get a 1099-INT from that financial institution either soon after you cash your bond or by January 31 of the following year.
  • If your bonds are in your Treasury Direct account, your 1099-INT is available early the next year in your account.

The clarifying question to ask concerns whether a decedent may have reported interest income and paid income tax in the years (s)he held the EE saving bonds prior to passing.

If the decedent reported interest income and paid income tax on the interest prior to his passing the estate does not recognize this income in the year the bonds are sold. 

Series I Bonds

  • The interest rate on a Series I savings bond changes every 6 months, based on inflation. The rate can go up. The rate can go down.
  • The overall rate is calculated from a fixed rate and an inflation rate.
  • The fixed rate never changes.
  • The inflation rate is reset every 6 months and, therefore, so is the overall rate.
  • You can buy electronic I bonds in your Treasury Direct account.
  • You can buy paper I bonds with your IRS tax refund.
  • Interest is subject to federal income tax but exempt from state income tax
  • You choose whether to report each year’s earnings or wait to report all the earnings when you get the money for the bond.

Series HH Bonds

  • Generally interest on HH bonds is paid semiannually to the bond holder and interest income is reported annually on the bond holder’s income tax forms (IRS Form 1099-int).
  • However certain HH bonds can be acquired by trading in another security.
  • The decedent may have acquired HH bonds by trading in another security.
  • IF any HH bonds were acquired via trade he would have a choice then for the tax on that interest:
    • pay it annually, or
    • wait and pay it later (defer it)
  • Interest that you decided to pay later is “deferred interest.”
    • If your HH bond has deferred interest, you see the amount identified on the front of the bond.
    • Deferred interest will be reported by the estate’s 2022 income tax forms
    • Deferred interest is not money the US Treasury owes the bond holder in addition to the face value of an HH bond.
    • Deferred interest is part of the face value of the HH bond.
    • Generally an executor will need to arrive at actually purchase price of each bond.
    • Be sure to look at each HH bond for deferred interest.
  • If no deferred interest there is no income tax implication to the estate.

For more information on US Savings Bonds tax implications contact me today.