Who pays the tax on inherited Savings Bonds - estate or heirs?

I have inherited some E and EE bonds. If I cash some of them does the estate have to pay tax on the interest they've earned? They were in my mother's name and Social Security Number.

Tom's response

If you are the Executor of your mother's estate, you have a lot of flexibility here. If not, you may be limited more by the Executor's plans than by tax or Savings Bond regulations.

Whether you redeem the bonds or keep them, the estate's Executor can either have the estate pay the income tax on the interest earned through the date of your mother's death or allow the bond interest to pass to the heirs untaxed.

If your mother's tax rate would be lower than that of her heirs (after considering the impact of the big lump of bond interest on her tax rate), it makes more sense for the estate to pay the income tax. If the heirs' rate is lower, it makes more sense for the heirs to pay it.

Check my page on federal income tax rates for help figuring this out.

Of the four choices…

• redeem - heirs pay tax
• redeem - estate pays tax
• keep - heirs pay tax
• keep - estate pays tax

…only the keep - estate pays tax choice can be problematic. If you decide to do that, you need to put some effort into avoiding the double-taxation trap. This issue is too complicated to go into here, but a complete discussion is in my book.