Stepped-up cost basis for inherited 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 decedant's old tax returns to see how much was declared.

It's a bit less rare for the interest income up to the date of death to be paid on the decedant'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 decedant's final tax return as a negative number. Keep a copy of the decedant's final tax return as proof in case you are audited.