When a single person dies, is there a stepup in basis on EE bonds? If yes, then I assume that there is no income tax on the deferred interest. If not, then would the interest earned be taxable income on: that person's final income tax return (1040); that person's estate income tax return (1041); or the income tax return of the person who inherites those EE bonds?
Inherited EE bonds
Feb 28, 2007
2 Replies
Your answer is in IRS Pub 550 (with examples) starting on page 9. Basically, someone is going to pay tax on all the interest. Assuming that the decedent had not elected to declare as taxable the interest that had been accruing each year (in all my years I have never come across an individual who did this), then the interest that had been accruing since the bonds were purchased becomes IRD (income in respect of the decedent). The new owner of the bonds will pay tax on all the interest when the bond is sold unless the new owner elects to declare all the accrued interest as income in the year that ownership changes. The one exception to this is if the person settling the estate elects to declare the accrued interest on the final income tax return of the decedent. Then the new owner would only pay tax on interest earned after the death. No matter how you slice it or dice it, the interest is going on someone's tax return eventually.
-- Alan
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Thank you for the information. I will download IRS Pub 550 next and read it.
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