Should the elderly redeem their bonds before passing them to heirs?
Tuesday, March 28th, 2006
Categorized as: Savings Bond taxes • Inheriting and bequeathing US Savings Bonds
My dad is 92 and in pretty good health. He has a large investment in Savings Bonds. Should he cash the bonds in or leave them to be cashed after his death? He is widowed and there are three of us children. I have Power of Attorney. He doesn't need the money now, but might later on.
Tom's response
First, are they still paying interest? If not, you should redeem them. The tax on these was officially due in the year they stopped paying interest.
If your father bought these bonds on a regular basis, filing amended returns for the years in which the bonds expired may actually be advantageous, as it can even the large lump of income out over several years.
If your dad likes Savings Bonds he can just reinvest in new ones. But save back enough money to pay the income tax. You'll find my post about calculating how much to hold back for taxes helpful.
If his bonds are still paying interest, there's still good reason to consider rolling them over into new bonds. When you do this your dad will owe tax on the interest, but as long as his tax rate is lower than the rate of his heirs, it makes good sense.
If he doesn't pay the tax on them now, his estate will either pay it on all of his bonds at once on his final tax return or his heirs will pay it at their rates - there's no way to get out of it. Paying a bit year by year usually lowers the family's total tax bill.
You'd benefit from a weekend reading my book, Savings Bond Advisor, especially the chapter called Managing the deferred-tax time bomb.
You should also make sure your Power of Attorney specifically mentions Savings Bonds.
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I CASHED A $ 5000.00 EE BOND THAT I PAID $2500.00 IN OCT 1992. CASHED IT OCT.5 2009.
the valvue at that time was $ 6,196.00.my question is how much federal tax do I OWE?
THANK YOU
Lois - The amount of income tax you will owe depends on your other income. You need to add the interest you've earned ($6,196 - $2,500 = $3,696) to your 2009 tax return that you'll file in the next few months.
If this is your only 2009 income, you'd owe no taxes at all. If your other taxable income is more than $372,950, you could owe 35% (less than $1,300).
Tom Adams
1 redid my kitchen and cashed in a $10,000 bond my mother left me. It was purchased in '91. I am on Social Security and have a pension and made about $2,000 income. I had to pay $2500 to the IRS. It doesn't seem fair…
Donna - You don't say how much your SS and pension benefits were, but if they were $20,000, then your total income was about $30,000, and your taxes were about 8.5% of your income. What rate do you think would be fair?
Tom Adams
I am 75 years old, married, retired, on ss. I have several thousand dollars worth of ee bonds, in my name with wife as beneficiary. We want to help with our grandsons' education expenses. What are our options. Give me some direct details, please. Do we even qualify?
Curtis - Grandparents can't get a tax deduction for college education expenses. Your best option is to cash a few of the bonds each year - keep the amount low enough that the interest earnings don't impact your taxes - and just give the money left after paying the tax to your grandsons.
Tom Adams
Tom, I was just reading the comments section. I liked to ask a follow-up question about Curtis' question. Although grandparents can't benefit the education tax deduction with savings bonds would it be feasible for him to change the registration of the bonds to make one of his children (the grandson's parent) a co-owner, who then could cash the bond in for the education of the grandsons and not pay any taxes on the interest if they are under the income limits?
Robert - If you change the owner from the grandparent to the parent it's a taxable event. The IRS has had years to figure out all the loopholes and close them. Sorry.
Tom Adams
I just found 6 $25 E series savings bonds from Jan. 1970. It is for my daughter from a dear friend of mine. It says "payable on his death". He's only 60. I read that interest stops earning after 30 years. Does my daughter just hold on to them even though it's not earning any interest? Do I ask my friend if they can be turned in and then put into an interest bearing savings account?
Theresa - Your friend will have to cash the bonds and give your daughter the money. She can't cash them herself.
Tom Adams