Savings Bond Interest

X inherits savings bonds on the death of his father. The bonds matured
years ago. X has no idea whether his father paid tax on bond interest.
What's the best approach here?
Reply to
Stuart O. Bronstein
It is rare that you have a cash basis taxpayer using the accrual method for reporting savings bond interest as it accrues (Series E, EE & I). Unless the new owner can show that the accrued interest income was already reported, then the assumption is that it was not reported by the cash basis decedent.
The personal representative of the estate could request prior tax returns from the IRS for the decedent. Unfortunately, it might not be obvious what interest is being reported on those returns. However, if there is a Schedule B with the source of the interest income identified and the US Treasury is not listed, then it would appear that the interest has never been reported as it accrued. If the accrual method was used, most tax preparers identify that interest as Accrued Savings Bond Interest in order to have a record that the accrual method was used. If you see US savings bond interest reported without an identifier that it is accrued interest then more analysis would be required to determine what type of bonds generated the savings bond interest. Obviously, without a Schedule B, a lot more investigation would be required.
IRS Pub 550 explains how the new owner(s) may report the accrued interest. There is more than one method. It starts at the bottom of page 8 and continues onto page 9 with examples.
Reply to
In article you write:
What kind of bonds are they? If they're HH, they paid interest semiannually and are redeemed at face value, so there's no gain when they're cashed.
If they're EE or I, interest is added to the principal and generally taxed when redeemed. It's possible to pay tax on interest as earned but nobody does that other than bonds bought for children in a zero tax bracket.
But I don't think it matters. Pub 559 says:
U.S. savings bonds acquired from decedent. If series EE or series I U.S. savings bonds, owned by a cash method taxpayer who reported the interest each year, or by an accrual method taxpayer, are transferred because of death, the increase in value of the bonds (interest earned) in the year of death up to the date of death must be reported on the decedent's final return. The transferee (estate or beneficiary) reports on its return only the interest earned after the date of death.
So the question of whether he paid the tax affects the father's final tax return, not X's problem. If there's no interest paid since the father died, there's no tax due.
Reply to
John Levine

Site Timeline Threads

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.