An inherited savings bond may or may not have immediate tax implications, but this is dependent on how the deceased gave the bond to you. If the bond goes directly to you, then no immediate taxes are required. But if there is no co-owner or beneficiary, the bond passes to the deceased person's estate and is administrated by the probate court before being distributed. In this case taxes apply to the overall estate before distribution occurs.
U.S. savings Series E and EE bonds are offered by the U.S. Treasury Department and are non-marketable, meaning you cannot buy or sell them unless you are an authorized agent. This bond is only redeemable by the person or persons named on the bond. When a co-owner dies, the other owner may redeem or keep the bond with no immediate tax implications. The same is true, if the bond is bequeathed directly to you. But if there are no other names on the bond, then it is redeemed, placed in the estate funds, and estate taxes apply to it as well as to the overall estate funds.
Because a U.S. savings bond is in essence a loan you make to the federal government, the additional profit is the added interest at the time you cash it out. You are responsible for paying taxes on any additional profit that the bond acquires after it is bequeathed to you or at its final maturity. This declaration is added to Form 1099-INT, which is mailed to you in the tax year the bond is redeemed. Besides this taxation, a savings bond has no other state or local taxation requirements.
HH Bond Exchange
If you receive an E or EE series and it reaches maturity, the accumulated interest becomes taxable in that year, unless the bond is exchanged for an H or HH series bond. Although the H or HH series bonds are no longer sold, the E series bonds can be exchanged for them. This allows you to put off paying taxes on the entire interest amount, but because the H series bonds pay a semiannual interest, you do need to declare this as income on your income tax report. You must also report on any accumulated interest of the E series savings bond when you redeem or when the H series bond reaches maturity.
U.S. savings bonds issued after 1989 may not require inclusion on a tax return if you use the funds to pay higher educational expenses in the year the bonds are redeemed or when the bond matures. To qualify for this option, the funds must be used to pay for tuition from an accredited college for yourself, your spouse or your dependents. Other college expenses like room and board do not qualify for this exception.
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