Inherited Savings Bonds.

[PIGLEE]

I am trying to find some IRS info about interest on inherited Savings Bonds. I have always understood that the person getting the bonds only has to pay the taxes on the interest those bonds have earned since the date of death of the inheritance. A stepped up basis. I need this in writing from an IRS publication. Does anyone have any suggestions?

[Corduroy Frog]

Ird

Piglet, I believe unclaimed interest on Savings Bonds qualifies as Income in Respect of a Decedent. That means its ongoing taxability is the same in the hands of recipient as it would be in the hands of the original owner.

Bonds bought for $7500 with a face value of $10,000, but a current value of $15,500 has a built-in taxability upon surrender of $8000. This assumes, of course, that none of the interest has been claimed previously. It is optional to recognize income as it accrues on savings bonds, but I've never had a client do that.

[S T]

Ownership

The person that inherited the savings bond - were they listed on the bond as a co-owner?

Here is a link http://www.savingsbonds.gov/indiv/re...ds_eedeath.htm

Sandy

[OtisMozzetti]

switching methods of reporting interest on savings bonds

This assumes, of course, that none of the interest has been claimed previously. It is optional to recognize income as it accrues on savings bonds...

I guess you more or less already said the following:

It is even possible to switch back and forth between "method 1" and "method 2". In that way, interest accrued to year end on all savings bonds owned can be recognized and then deferral of interest can resume, or not, the following year. That sort of timing can useful in "tax planning".

[Lion]

Final Return

If the decedent's final return has not been filed and it was a low income year for him, ill and not working for instance, why not report qualified interest on decedent's final return if that tax rate is lower than the rate of the beneficiary?

[Snaggletoof]

Didn't Know This

I guess you more or less already said the following:

It is even possible to switch back and forth between "method 1" and "method 2". In that way, interest accrued to year end on all savings bonds owned can be recognized and then deferral of interest can resume, or not, the following year. That sort of timing can useful in "tax planning".

Interesting Otis, I didn't know a taxpayer had the option of turning his interest on and off like a water spicket. In other words, he can accelerate his interest earnings (like Lion suggests) for a bad year, then stop them the next year and let the taxability accrue until cashing out? Essentially allows the taxpayer to recognize his earnings in fits and starts. If this is true, I've got one client with $400,000 in pent-up interest. Her husband started buying in 1942, and she is getting checks every year from bonds which are no longer authorized to pay interest and are being cashed out. I believe they have a maximum authorized length of 40 years, and she has been receiving these for years and years.

[New York Enrolled Agent]

I am trying to find some IRS info about interest on inherited Savings Bonds. I have always understood that the person getting the bonds only has to pay the taxes on the interest those bonds have earned since the date of death of the inheritance. A stepped up basis. I need this in writing from an IRS publication. Does anyone have any suggestions?

There is no stepped up basis. The executor of the decdent can ELECT to report all the interest upto the day of death on the decedent's final return. See Rev Ruling 68-145. If that is done, the beneficiary then claims interest from the day of death to redemption or maturity of the savings bonds. The unreported interest up to the day of death is IRD.

I agree that you can change from deferred to annual and vice versa but I'll ask Otis - doesn't Rev Proc 2002-9 restrict that change to once every 5 years??? I'm not sure if that's correct but I throw it out for discussion.

[Davc]

If the fiduciary who filed the decedents final return elected to include all interest earned up to DOD, then the beneficiary would only report interest after DOD. Otherwise, the bene gets to report it all.

And you aren't allowed to switch methods. Once the election to report the interest is made it is for all bonds owned or acquired later and affects all future years.

454(a) Non-Interest-Bearing Obligations Issued At A Discount
If, in the case of a taxpayer owning any non-interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals or owning an obligation described in paragraph (2) of subsection (c), the increase in the redemption price of such obligation occurring in the taxable year does not (under the method of accounting used in computing his taxable income) constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obligations thereafter acquired by him and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Secretary permits him, subject to such conditions as the Secretary deems necessary, to change to a different method. In the case of any such obligations owned by the taxpayer at the beginning of the first taxable year to which his election applies, the increase in the redemption price of such obligations occurring between the date of acquisition (or, in the case of an obligation described in paragraph (2) of subsection (c), the date of acquisition of the series E bond involved) and the first day of such taxable year shall also be treated as income received in such taxable year.

[PIGLEE]

I am afraid that I assumed something wrong, a long time ago. Thanks for confirming what my research was telling me.

[Burke]

Here is a related question. TP wants to GIVE U.S .Savings bonds to relatives. Instead of cashing them in incurring all interest up to date of surrender herself, can she pass her basis on to the donees and let them redeem if and when they choose, reporting at that time the individual accrued interest pertaining to each bond? Bonds are owned wholly in her name at present.

[OtisMozzetti]

timing of interest

Interesting Otis, I didn't know a taxpayer had the option of turning his interest on and off like a water spicket. In other words, he can accelerate his interest earnings (like Lion suggests) for a bad year, then stop them the next year and let the taxability accrue until cashing out? Essentially allows the taxpayer to recognize his earnings in fits and starts. If this is true, I've got one client with $400,000 in pent-up interest. Her husband started buying in 1942, and she is getting checks every year from bonds which are no longer authorized to pay interest and are being cashed out. I believe they have a maximum authorized length of 40 years, and she has been receiving these for years and years.

Mr. Snaggletoof, I think that the option to turn the interest reporting from U.S. savings bonds on and off "like a spigot" as you put it is a useful tax planning advantage of that investment. Do keep in mind, though, that it applies to all savings bonds held as of Dec. 31 of the year in question. There is a certain amount of paperwork, described in Publ. 17, that is required.

Concerning the bonds that date back up to 67 years, keep in mind that accumulated interest is recognized as taxable income when "final maturity" is reached, i.e. unless the Treasury has allowed the bonds to be exchanged with continued interest deferral.

Also, with that client who has perhaps $400,000 of deferred interest, a change in reporting method would cause a major hit into high tax rate brackets during one tax year. A far better technique might likely be to spread the income over two or more different tax years.

Important Warning: Others below have noted that the change from current reporting of interest (method 2) to deferred reporting (method 1) cannot be done automatically if it has been done automatically within the past 5 tax years. In other words, the "spigot" can be turned off no more frequently that once every 6 years?????

[Corduroy Frog]

NYEA does it again...

I agree that you can change from deferred to annual and vice versa but I'll ask Otis - doesn't Rev Proc 2002-9 restrict that change to once every 5 years??? I'm not sure if that's correct but I throw it out for discussion.

Otis, that's what I mean about this guy. Danged Yankee knows EVERYthing.

[Gene V]

how to change reporting method

There is a whole section on reporting option for cash method taxpayer on Series EE,E and I bonds. Starts on page 57 Pub. 17

http://www.irs.gov/pub/irs-pdf/p17.pdf

[OtisMozzetti]

What I read in Rev. Proc. 2002-9 and in Publ. 17

[QUOTE=New York Enrolled Agent;84385I agree that you can change from deferred to annual and vice versa but I'll ask Otis - doesn't Rev Proc 2002-9 restrict that change to once every 5 years??? I'm not sure if that's correct but I throw it out for discussion.[/QUOTE]

The two methods of reporting (using the terminology of Publ. 17) are "method 1" = deferral of the interest reporting and "method 2" = reporting the interest each year.

What I read in Rev. Proc. 2002-9 is the following:

1. It says that the procedure it gives for automatic change applies only to cover change from (method 2) to (method 1). It does not apply to the initial choice of method 1 vs. method 2, nor to change from method 1 to method 2. In other words, you have to go on the record via those procedures whenever you want to start to defer the interest until bonds are redeemed, reach final maturity, etc.

2. It does say that the procedure it covers cannot be done (at least not with the automatic procedure discussed) if the same change was performed during any of the preceding 5 tax years. At that rate the taxable income spigot could be turned off no more frequently that once every 6 years.

What I read in Publ. 17 is the following:

3. A recipe for changing from method 1 to method 2 and from method 2 to method 1. There is no hint anywhere about "the prior 5 tax years".

Otis, California Enrolled Agent

[erchess]

Clarity Please

I guess we all knew that US Treasury bond interest can be reported either as it accrues or when the bond is cashed in before we came to this thread. I've never personally encountered a client who wanted to report income which they had not actually received and which they had the right to defer reporting. I've also never seen a case where doing that made sense to me.

However. am I right in sensing disagreement on whether and to what extent is is ok to change between pay as accrues and pay at the end and what impact does your choice with this bond have on your choice with other bonds you own? I'd really like to get a handle on this but I may be wanting a simple answer that cannot be disputed where none is possible perhaps because the matter has not been litigated nor spelled out in the code.