Dear Dr. Don,
My aunt passed away recently. In her will, she left me a box of Series E saving bonds, many of which were fully mature in 1990. Only her name is listed on the bonds. How can I cash these bonds without paying 20 years of tax penalties on the interest they pay? Or, since I just inherited them, will I be responsible for paying the interest in the year I cash them without prior years of unreported and unpaid taxes?
-- Inherits Problem
The tax issues are fairly involved and you'll need professional tax advice on this matter, some of which can come from the personal representative who filed the final income tax return for the decedent (your aunt).
You didn't inherit the taxes and penalties due associated with the savings bonds, although it is likely to influence the value of your inheritance. IRS Publication 550, "Investment Income and Expenses," speaks to the taxation of the savings bonds based on the how the decedent chose to treat the annual earnings. IRS Publication 559 (2009), "Survivors, Executors, and Administrators," also speaks to the tax issues. But you really want professional advice on this matter.
The TreasuryDirect Web page, "Death of a Savings Bond Owner," explains what you need to do to redeem the bonds. I'd recommend sorting through the tax issues before redeeming the bonds.
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