taxes

Tax due on jointly held savings bonds?

George Saenzq_v2.gifDear Tax Talk,
I held some Series HH bonds jointly with my mother. When she passed away, the bonds became mine. I have since cashed them. Will I be responsible for the interest the bonds made while I had them? Will I have to pay taxes on the original investment even though they were originally under my mother's Social Security number? Did she have to pay the taxes on the Series EE bonds before she rolled them into the HH bonds?
-- June

a_v2.gifDear June,
If I understand correctly, you and your mom jointly held Series HH bonds, which mom obtained by converting EE bonds that you did not own jointly. After your mom died, you cashed the HH bonds.

The advantage of Series EE bonds is that you could defer paying interest on them until they matured. At maturity you could defer paying the tax on the accumulated interest if you reinvested in Series HH bonds. Series HH bonds are no longer available. When the Series HH bonds are redeemed, tax is paid on the deferred interest from the Series EE bonds.

Series HH bonds pay interest semiannually, so the interest earned since your mom's death would clearly be taxable to you.

Upon death of one of two people named in a bond's registration, any surviving person named on bonds as co-owner or beneficiary becomes the new owner. As the new owner, this person is required to include, on his or her tax return, the interest earned on the bonds for the year the bonds are redeemed. Also, whoever files the deceased person's final, individual, federal income tax return for the year that person died has the option of reporting all interest earned on the bonds up to the date of death.

Hence, either you can report the deferred interest income on your tax return or your mom's estate executor can report it on a final income tax return for your mom -- Form 1040. Obviously, you should do whatever is more advantageous. If your mom does not have an executor, you can file her final income tax return as a survivor.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "Taxes" as the topic. Read more Tax Talk columns.

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