Series E Savings Bonds

[frankie123]

Have question dealing with Series E Savings bonds and what happens with them at the death of the owner. Have a client whose mother has a lot of them and her Financial Advisor told her she needed to cash them in and pay the tax, he is saying approximately $16,000 tax which seems unreal. I have been told she has maybe a million dollars. The bonds she has had for years.

The question at hand is does the bonds go to zero if she passes away or would they go to her heirs by way of her will. She is 84 years old and has had a medical condition this past week that required surgery. She does not want to cash them in or pay the tax. Thanks for any insight here

[TaxGuyBill]

Series E? Are you SURE about that? Or do you mean Series EE? If I remember correctly, all Series E bonds have matured a long time ago.



If you mean Series EE:


The first thing to check is if the mother has been reporting the interest every year, or has been waiting to report the interest until they are cashed. If the mother has been reporting it every year, that need to continue to be reported, and that amount would be taxable. However, it is uncommon for people to report it ever year.

The next thing to check is when in the maturity date of the bonds. If they have matured, the interest must be reported in the year of maturity. If they have matured, cashing them in makes sense.

If neither of those are true, the mother is not required to cash them in, and they would not be taxable unless they are cashed in. She would need to ask the Financial Advisor why they think they need to be cashed in.


No, they don't get a 'step up' and zero out when the mother dies. Somebody pays tax on the interest.

If the mother passes away, they have the OPTION to report the accrued interest on the mother's final tax return. In that case, the beneficiaries who inherit the bonds will only pay tax on the interest earned after death (they have the option to report the interest each year, or to wait until they are cashed or mature). If they do NOT choose the option to report the accrued interest on the mother's final tax return, then the beneficiaries are responsible for all interest (they have the option to report the interest each year INCLUDING all prior years, or to wait until they are cashed or mature).



If you actually means Series E, check the maturity date, because that could be a problem if they have matured many years ago.

[frankie123]

Thank you for all the information, my client thinks they are Series E and are old. Is there any site you can go on to look up what this will mean. They know she has the FA but they want to know more about it. The mother is doing good and home from hospital but now that the family is aware of this they would like to get it under control.

[TAXNJ]

Thank you for all the information, my client thinks they are Series E and are old. Is there any site you can go on to look up what this will mean. They know she has the FA but they want to know more about it. The mother is doing good and home from hospital but now that the family is aware of this they would like to get it under control.

You might consider having the client consult with a Tax Attorney if the issue is beyond your scope. It would be fair to the client and your business.

[Burke]

Thank you for all the information, my client thinks they are Series E and are old. Is there any site you can go on to look up what this will mean. .

Tell your client to stop "thinking" and find out exactly what they are. Where are the bonds? There is a website which they can access which will calculate their value, type, date of issue, etc. I would recommend making a copy of all of them for your records. The face amount will be on the bonds. The serial numbers can be input for their records online.
The website is https://www.treasurydirect.gov. Select Individuals and then Tools from drop-down box, then Savings Bond Calculator.

[frankie123]

Thanks everyone for your input. You know I don't think anyone has any idea of what she has and from what I am seeing she is not at all interested in telling them. So I am thinking I am done trying to find out info for them. If they bring me straight info then I will try to help them. She has a Financial Planner so they can go talk to them, which is what they should have done to start with. Thank you all

[TAX4US]

Continue conservation from TaxGuyBill. What would happen if they had matured many years ago?

[TaxGuyBill]

Continue conservation from TaxGuyBill. What would happen if they had matured many years ago?

If it is past the 3 or 6 year limit (the 6 year limit is for under-reporting your gross income by over 25%), I think hypothetically you won't owe tax on it at all.

The first problem is that when the bonds are cashed, IRS will receive a 1099-INT that shows that as income and they will expect to see that on the tax return. So then you will need to respond and argue that the interest is not reportable in the current year, and should have been reported in a prior year. Then assuming you were to then amend the old tax return to claim the bond income (which is past the 3 or 6 year Statue of Limitation for assessment), the next problem is that the IRS might try to apply the "willful attempt to evade tax" clause which has no Statute of Limitations (and huge penalties).

[TAXNJ]

…. IRS might try to apply the "willful attempt to evade tax" clause which has no Statute of Limitations (and huge penalties).

….


There might be an exception of the bonds were misplaced and recently found.

"If it is past the 3 or 6 year limit (the 6 year limit is for under-reporting your gross income by over 25%), I think

hypothetically you won't owe tax on it at all."
Agree with that statement

[New York Enrolled Agent]

….


There might be an exception of the bonds were misplaced and recently found.

"If it is past the 3 or 6 year limit (the 6 year limit is for under-reporting your gross income by over 25%), I think

hypothetically you won't owe tax on it at all."
Agree with that statement

Well to play Devil's Advocate, I'll say I disagree.

In R.H.Stearns 291 US 54 (1934), the Supreme Court basically created the Duty Of Consistency.

In simple terms it says "you can't take advantage of your own wrong". The taxpayer should have reported the interest in the year of maturity - the taxpayer didn't - now the beneficiary is going to claim no tax on the interest that was paid now and wasn't previously reported. I don't buy that.

The Duty is discussed in TCM 2016-116 where the 9th Circuit is quoted:

When all is said and done, we are of the opinion that the duty of consistency not only reflects basic fairness, but also shows a proper regard for the administration of justice and the dignity of the law. The law should not be such a[n] idiot that it cannot prevent a taxpayer from changing the historical facts from year to year in order to escape a fair share of the burdens of maintaining our government. Our tax system depends upon self assessment and honesty, rather than upon hiding of the pea or forgetful tergiversation.

[TAXNJ]

Well to play Devil's Advocate, I'll say I disagree.

In R.H.Stearns 291 US 54 (1934), the Supreme Court basically created the Duty Of Consistency.

In simple terms it says "you can't take advantage of your own wrong". The taxpayer should have reported the interest in the year of maturity - the taxpayer didn't - now the beneficiary is going to claim no tax on the interest that was paid now and wasn't previously reported. I don't buy that.

The Duty is discussed in TCM 2016-116 where the 9th Circuit is quoted:

When all is said and done, we are of the opinion that the duty of consistency not only reflects basic fairness, but also shows a proper regard for the administration of justice and the dignity of the law. The law should not be such a[n] idiot that it cannot prevent a taxpayer from changing the historical facts from year to year in order to escape a fair share of the burdens of maintaining our government. Our tax system depends upon self assessment and honesty, rather than upon hiding of the pea or forgetful tergiversation.

Not that one is evading any tax liability but if one finds misplaced 20+ years ago and recently located they can always cash the bonds and pay the tax due. Are you saying to amend a 20+ year old return?

[TaxGuyBill]

Well to play Devil's Advocate, I'll say I disagree.

In R.H.Stearns 291 US 54 (1934), the Supreme Court basically created the Duty Of Consistency.

In simple terms it says "you can't take advantage of your own wrong". The taxpayer should have reported the interest in the year of maturity - the taxpayer didn't - now the beneficiary is going to claim no tax on the interest that was paid now and wasn't previously reported. I don't buy that.

The Duty is discussed in TCM 2016-116 where the 9th Circuit is quoted:

When all is said and done, we are of the opinion that the duty of consistency not only reflects basic fairness, but also shows a proper regard for the administration of justice and the dignity of the law. The law should not be such a[n] idiot that it cannot prevent a taxpayer from changing the historical facts from year to year in order to escape a fair share of the burdens of maintaining our government. Our tax system depends upon self assessment and honesty, rather than upon hiding of the pea or forgetful tergiversation.

Okay, but HOW to do it? The law clearly says the tax should be due the EARLIER of the final maturity date or the year it was redeemed. So I would not sign a current year tax return with the interest on it, as I know the law clearly says that is wrong.

Then I would amend the old prior tax return, as I know that is when it should have been reported. But the IRS is almost certainly to not process the return, as it is past their Statute of Limitations. I'm not going to bring the IRS to court trying to get them to assess the tax.

[New York Enrolled Agent]

Not that one is evading any tax liability but if one finds misplaced 20+ years ago and recently located they can always cash the bonds and pay the tax due. Are you saying to amend a 20+ year old return?

No - IMO the tax is paid in the year of redemption. Read the case I cited and others where the Duty is noted.

[Burke]

Thank you for all the information, my client thinks they are Series E and are old. Is there any site you can go on to look up what this will mean. They know she has the FA but they want to know more about it. The mother is doing good and home from hospital but now that the family is aware of this they would like to get it under control.

I agree with your 6/5 post about washing your hands of the matter. It appears the Mother is still responsible for her own affairs at this point. If one of these children has a POA (common at the mother's age), perhaps they could look into a safe deposit box contents. Interesting that they even found out about them. It looks like the Financial Advisor was the conduit for the information.

[TAXNJ]

No - IMO the tax is paid in the year of redemption. Read the case I cited and others where the Duty is noted.

Thanks. Clients who have found missing or misplaced bonds by no fault and not attempting to evade taxes are responsible for any tax due when redeeming. Will not treat or scare a taxpayer into thinking they are evading taxes (with criminal intent) but rather have them file the tax return claiming the interest and work with the IRS if necessary.