It depends. Gift tax does not come into play when a bond is inherited. Gifts only apply when the donor is alive.
When the bonds are cashed the interest will be income to the beneficiary since tax was never paid on those earnings. Your son would have to include the interest on his own return as you stated.
Your daughter, even if your dependent, will need to file a return because it seems she meets the following dependent filing requirements below.
- Tax requirements for dependent children are different from those of other taxpayers.
- A dependent child who has earned more than $14,600 of earned income (tax year 2024) typically needs to file a personal income tax form. Earned income includes wages, tips, salaries, and payment from self-employment.
- A dependent child who receives more than $1,300 in investment income in 2024 is required to file a tax return. Investment income includes interest and dividend payments.
- If your child’s investment income consists only of interest and dividends, you can use IRS Form 8814 to include it on your own return and combine it with your own income. Doing this may push you into a higher tax bracket and result in higher income tax than if you prepare a separate return for your child. My advice would be to file your daughter's return and have the income reported that way.
- @memburto
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