U.S. Savings Bonds and the Unique Income Tax Rules After Death

After death, most assets pass to your loved ones without incurring any federal income tax liabilities. Only interest that accrues on the asset from the time your loved one becomes the owner of the asset will be taxed. However, there are certain types of assets that may trigger a federal income tax liability. This includes IRA’s and other types of retirement accounts. Further, U.S. Savings Bonds are subject to their own special rules with regard to inheritance and taxation.

U.S. Savings Bond During Estate Administration: an Overview

Typically, the income from a U.S. Savings Bond accrue without incurring taxes until they are cashed in. If the bond owner dies, the new owner must pay tax on the interest that accrued during the decedent’s lifetime. . The IRS refers to this as “income in respect of a decedent.” This tax is due and payable when the new owner cashes in the bonds.

However, estate administrators have an important decision to make. The interest that accrued up to the date of death of the original bond owner can instead be reported on the decedent’s final income tax return. This is typically done if the decedent is in a lower tax bracket than the beneficiary. By choosing this option, the beneficiary of the bond only has to include the interest earned after the date of death on his or her income tax return.

The tax responsibilities that accrue when someone dies can be numerous. Our article “Having Left This World, You Still Need to Pay Your Taxes in California,” offers helpful insight into the liabilities that may result.

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Scott Grossman

Scott Grossman

Attorney

The Grossman Law Firm, APC · 525 B Street, Suite 1500, San Diego, CA 92101 · (951) 523-8307
 

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