Stepped-up cost basis for inherited Savings Bonds?

Monday, February 7th, 2005
Categorized as: Inheriting and bequeathing US Savings Bonds

We have inherited some savings bonds and have cashed them. How do we establish a cost basis at the point of death for calculating our taxable income of the interest?

Tom’s response

Unless the person you inherited them from paid interest on them, you owe tax on the entire amount of interest. People are often surprised by this, because stocks received a stepped-up basis when they are inherited. However, that rule applies to capital gains, not to interest income. So it doesn’t apply to Savings Bonds.

It’s rare for people to declare Savings Bonds interest year by year as income, but it’s allowed and it sometimes happens. You’d have to look through the decedent’s old tax returns to see how much was declared.

It’s a bit less rare for the tax on the interest income up to the date of death to be paid on the decedent’s final tax return. Executors have this option, but most pass Savings Bonds on to the heirs without calculating the income to the date of death and paying the tax.

If the Executor did so in your case, you add a line to Schedule B that says “Interest on Savings Bonds on which tax has already been paid” and enter the Savings Bond interest income amount from the decedent’s final tax return as a negative number. Keep a copy of the decedent’s final tax return as proof in case you are audited.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

2 Comments

On February 17th, 2009 Denis said:

is it permissible for the deceased to pay the taxes on the the interest as part of the final tax return? For instance, Tom died July 31,2008 with $40000 worth of bonds. Tom will pay income tax on all interest accrued to 7/31/08. Mary, his heir, will pay income tax on all interest from 7/31/08 to 11/28/08–the date all were cashed.

Thanks for your assistance

On February 18th, 2009 Tom Adams said:

Denis – yes, that’s permissible, but you need to get all the details right to satisfy the IRS. My book has the details you need to do this.

Tom Adams

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June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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