Another thing to note: Savings bonds don't get a step-up in basis at death the way stocks or other investments do. That means you have to pay tax on the full amount of interest due on the bonds as the inheritor.
A survivor is named on the bond(s)
If you are the named co-owner or beneficiary who inherits the bond, you have different options for paper EE or I bonds and paper HH bonds. If only one person is named on the bond and that person has died, the bond belongs to that person's estate.
Upon the death of the owner, the security becomes the property of the surviving beneficiary, despite any attempted testamentary disposition or any applicable local law to the contrary. (v) If the beneficiary does not survive the owner, the security belongs to the estate of the owner.
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.
On the downside, the fixed-rate component of I bonds tends to be relatively low, especially during periods of low interest rates. “While you can redeem I bonds after one year, there's a penalty for redeeming them within the first five years,” Bergquist noted.
I cashed some Series E, Series EE, and Series I savings bonds. How do I report the interest? In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.
TO CASH BONDS FOR A DECEDENT'S ESTATE:
Series EE, Series E, and Series I bonds can be cashed at a local financial institution. Some of these transactions may have to be forwarded for further processing. Series HH and Series H bonds must be sent to one of the addresses shown at the bottom of the following page.
Click on the ManageDirect tab at the top of the page. Under Manage My Account, click Update my Registration List. Click Add Registration. Select the Beneficiary check box at the top.
Tax paid by the estate
The income tax rate for estates is equivalent to the basic rate, 8.75% (dividends) and 20% (all other income). There are no allowances available. Therefore, the estate will pay 20% on all bond gains. Onshore investment bond gains have an income tax credit of 20%, which covers the liability.
They don't have to go through the probate process to cash out the bond. Beneficiary designation: You can designate a beneficiary of the I bond with the U.S. Treasury Department. It will bypass probate and transfer ownership to your beneficiary upon your death.
Examples of Assets That Step-Up in Basis
Individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in taxable accounts. Real estate – this includes many forms, such as multi-family residences, primary residences, vacation homes, and office buildings. Businesses and the equipment in the business.
Additionally, US Savings Bonds can be registered with a beneficiary. In this case, the bonds automatically pass to the designated beneficiary upon the death of the bondholder without going through probate. The beneficiary must provide the necessary documentation to redeem or re-register the bonds in their name.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
If a financial institution pays the bond, you get a 1099-INT from that financial institution either soon after you cash your bond or by January 31 of the following year. If your bonds are in your TreasuryDirect account, your 1099-INT is available in your account by January 31 of the following year.
If the executor doesn't include predeath interest on the decedent's final return, then the beneficiary owes federal income tax on all pre- and post-death interest on the earlier of the bond's maturity or redemption.
You can choose not to pay federal income tax on them until you cash them or they mature, whichever is first. Under certain conditions, you can avoid federal income tax on interest by using the interest to pay for higher education.
Split for Multiple Beneficiaries
If you have two children, you can't name both of them as 50/50 beneficiaries on the same bond. You'll have to buy two bonds, one with each child as the beneficiary. See How to Buy I Bonds.
A Social Security Number must be provided. If this is a gift bond purchase, use the owner's name and SSN, if available. If the owner's SSN is not available, use the purchaser's SSN. Use of the purchaser's SSN does not confer rights to the bond or require interest reporting.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
I bonds have important tax advantages for owners. Interest earned on I bonds is exempt from state and local taxation. Also, owners can defer federal income tax on the accrued interest for up to 30 years.
Banks are required to report Cash deposits of more than 10L in a financial year (regardless of no. of installments) Cash or transfers you get from your parents, siblings and spouse is tax-free regardless of amount. There's no limit to how much funds you can have in a savings account.
The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date. The composite rate combines a 1.30% fixed rate of return with the 2.96% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).