How can I estimate taxes on inherited CDs and government savings bonds?

[kritter-k]

My father passed away recently, and my mother is very ill. I am the executor of their estate. They have a revocable living trust, and I am trying to predict the tax consequences for myself and other heirs.  They have about one million dollars in CDs and savings bonds that have earned interest for which no taxes have yet been paid. Are my following assumptions correct?

- Because their estate is less than $13,610,000, there will be no federal estate tax and I won't need to file federal Form 706.

- Because I live in Colorado, no state estate tax or state inheritance tax will be imposed.

- Because the heirs live in Pennsylvanian, they might owe state inheritance taxes.

- When inheritors redeem their inherited bonds, they will owe taxes on all the interest that has accumulated, and that interest will be taxed at ordinary income tax rates not as capital gains.

- Likewise, when the CDs that inheritors receive mature, the inheritors will owe taxes on all the interest that has accumulated, and that interest will be taxed at ordinary income tax rates not as capital gains.

[M-MTax]

- Because their estate is less than $13,610,000, there will be no federal estate tax and I won't need to file federal Form 706.

That is correct. 

- Because I live in Colorado, no state estate tax or state inheritance tax will be imposed.

Also correct.

- Because the heirs live in Pennsylvanian, they might owe state inheritance taxes.

No. The PA inheritance tax applies to decedents who were residents of the state at the time of their deaths or owned tangible personal property in the state.

[M-MTax]

- When inheritors redeem their inherited bonds, they will owe taxes on all the interest that has accumulated, and that interest will be taxed at ordinary income tax rates not as capital gains.

Ordinary interest income but exempt from state tax if federally issued.

[M-MTax]

- Likewise, when the CDs that inheritors receive mature, the inheritors will owe taxes on all the interest that has accumulated, and that interest will be taxed at ordinary income tax rates not as capital gains.

No. Interest earned post mortem is taxable to the beneficiaries as ordinary interest income.

[kritter-k]

Regarding taxes on interest earned on CDs, do you mean that no one will have to pay income taxes on the interest earned while my parents were alive and that heirs will pay income tax only on interest that accrued after my parents' death?

[M-MTax]

Interest accrued on savings certificates.

The interest accrued on savings certificates (redeemable after death without forfeiture of interest) for the period from the date of the last interest payment and ending with the date of the decedent's death, but not received as of that date, is income in respect of a decedent. Interest accrued after the decedent's death that becomes payable on the certificates after death isn't income in respect of a decedent, but is taxable income includible in the income of the respective recipients.

[kritter-k]

OK, thanks for verifying that interest earned post-mortem is taxable to the beneficiaries as ordinary interest income. But I still don't unstained if any taxes are due by anyone on interest earned between the time when the CD was opened and when the last decedent (my mother, in this case) died. Are you saying that when the last decedent dies, all interest accrued from for the entire length of time from the opening of the CDs until the CDs are redeemed by the beneficiaries after the death of the decedent becomes post-mortem interest and is includible in the income of the respective beneficiaries and taxed as such?

[M-MTax · Accepted solution]

They're telling you that interest earned before death but paid after death is IRD.....income in respect of a decedent. Who receives that income pays tax on it whether it's an individual, estate, or trust.

[kritter-k]

Oh, I see. Thank you for clearing that up!