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How do I report savings bond interest for a deceased taxpayer?

by TurboTax•179• Updated 4 months ago

US savings bonds are sold in two different series (Series EE and Series I), and both are only sold electronically at face value of the bond. (Series EE bonds were previously sold in a paper bond at 1/2 of their face value.) Each of these bonds has a 30-year maturity period.

The savings bond owner has two options for recognizing interest income from the bond:

  1. The cash method reports the interest income annually by determining the increased redemption value of the bond.
  2. The accrual method postpones reporting the interest income until the year the bond is cashed, transferred, or reaches maturity.

For instructions on how to report the savings bond income in the year the owner dies, select their reporting option.

If Series EE or Series I bonds owned by a cash-method taxpayer who reported the interest each year are transferred because of death, the increase in value of the bonds (interest earned) up to the date of death must be reported on the decedent’s final return. The transferee (estate or beneficiary) reports on its tax return only the interest earned after the date of death.

If the bond was transferred due to the death of the owner, and it was owned by an accrual method taxpayer who chose not to report the interest each year, interest earned before death must be reported in one of the following ways:

  1. The person (executor, administrator, and so on) who’s required to file the decedent’s final income tax return can elect to include all of the interest earned on the bonds before the decedent’s death on the return. The transferee (estate or beneficiary) then includes only the interest earned after the date of death on their income tax return.
  2. If the election in the above wasn’t made, the interest earned to the date of death is income in respect of the decedent and isn’t included on the decedent’s final return. In this case, all of the interest earned before and after the decedent’s death is income to the transferee (estate or beneficiary). A transferee who uses the accrual method of accounting and who’s chosen not to report the interest annually, may defer reporting any of it as income until the bonds are either cashed or mature (whichever is earlier). In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid that arose because part of interest (if any) was included in the decedent’s estate.

If you’re the beneficiary of a savings bond where a portion of the accrued interest was previously reported as income on either the decedent’s final personal income tax return (1040) or on the estate income tax return (1041), you can enter an adjustment to the savings bond interest reported on the 1099-INT to reflect only your taxable portion. Here's how:

  1. Open or continue your return, if you haven't already.
  2. Select Federal, then Wages & Income.
  3. Locate Investments and Savings and select Start or Revisit next to Interest on 1099-INT.
  4. Answer Yes on the next screen, then follow the onscreen instructions to enter the info from your 1099-INT.
    • If you chose to type in your info, select Enter a different way on the Let's import your tax info screen, then on the next screen choose the Interest option and Continue.
  5. On the screen Do any of these uncommon situations apply? check the box next to I need to adjust the interest reported on my form.
  6. On the next screen, enter the Adjustment amount in the box provided.
  7. Under Reason for adjustment, select This savings bond interest was previously reported.