EE savings bond tax basis

[charlie]

Hi all,

Long time, no see, etc. I hope you are well .... I am fine.

Does anybody know if inherited EE savings bonds have a stepped up
tax basis like stocks, property etc? I can't get a clear answer from the
US gov "publicdebt" site.

Thanks and cheers,

Charlie

 

[wabmester]

Hey, Charlie! That's an interesting question. A stepped-up basis wouldn't help, since savings bonds don't have any cap gains -- just accrued interest. So, basically, I believe the answer is no.

link

 

[brewer12345]

Dunno about the bonds, but it is nice to see you, charlie.

 

[Martha]

Charlie!  Welcome home. 

EEbonds get tough tax treatment on death.  If you have a taxable estate, you have to pay estate taxes on the whole value including interest.  Either the heirs as they cash in the bonds, or the decedent on his final tax return, has to pay income taxes on the interest as well.  There is a partial credit for estate taxes on this  "income in respect to a decedent", but the taxes still have a big hit.

If you need a link, I can probably scare one up for you. 

 

[Nords]

Does anybody know if inherited EE savings bonds have a stepped up
tax basis like stocks, property etc?

No, because they produce unearned interest income instead of cap gains.

Eh, I'm just half a step behind Martha...

Here's some text from Ch 1 of IRS Pub 550:
    Decedents.   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner, depends on the accounting and income-reporting method previously used by the decedent.
    Decedent who reported interest each year.   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. The person who acquires the bonds includes in income only interest earned after the date of death.
    Decedent who postponed reporting interest.   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways.
    The surviving spouse or personal representative (executor, administrator, etc.) who files the final income tax return of the decedent can choose to include on that return all of the interest earned on the bonds before the decedent's death. The person who acquires the bonds then includes in income only interest earned after the date of death.
    If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent. It should not be included in the decedent's final return. All of the interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. In the year that person reports the interest, he or she can claim a deduction for any federal estate tax that was paid on the part of the interest included in the decedent's estate.
    For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators."

There are several examples in the pub after this verbiage.

 

[charlie]

Thanks for the great replies!!

I found that the only way to beat the tax man is to
donate inherited EE bonds to your favorite charity.
You get the donation credit on your income tax
return and the charity pays no tax.

On a related topic, can the owner of an EE bond
change the registration from the owner's name
with POD to a named beneficiary to show the
named beneficiary as the sole owner without
regard to the $11,000/year limit for non-spouses?

The reason I am asking all these questions is that
my mom has a bunch of EE bonds with either my
brother or myself named as POD beneficiaries. I
am looking for a way to avoid the messy issues
of state involvement when she passes. She is 90.5
and does not need the bonds for income.

Cheers,

Charlie

 

[SteveR]

Welcome back Charlie.

I have some issues with EE bonds too that I have been working on since my wife's death. She had bonds with a POD of her first (divorced) husband. Her intent was to change them over to me as the POD but never got a chance to do it. Legally, I cannot now change the POD and they were not specifically addressed in her will. I had two lawyers look into this for me but their opinion was that there was no way to change the ownership without her ex-husband filling out all the forms to do so. There is zero chance of that.

If you are now the legal owner, you can have them reissued in your name with a new POD or co-owner. You can also transfer ownership to a new owner if you like once you change the name on the bonds to you as primary owner.