Are Inherited Savings Bonds Taxable?

You might be stuck footing the tax bill for the accumulated interest on an inherited savings bond.

Comstock/Comstock/Getty Images

Savings bonds allow owners to defer paying taxes on the accumulating interest until the bond is cashed in. After someone dies, the law generally says to transfer savings bonds after death to the beneficiary on the bond. How the bond is eventually taxed depends on how the decedent and her estate treated the accumulated interest. The earnings on inherited savings bonds are not taxable to the heirs if the decedent already paid taxes on the accumulated interest, but heirs are responsible for paying any unpaid taxes.


No tax will be owed on an inherited savings bond's accumulated interest if the decedent has already paid taxes on it.

Taxes Before Cashing Bonds

The interest accumulated on the savings bond won't be taxed when you cash in the bonds if it was included in the decedent's taxable income. This can be accomplished in two ways. First, the decedent may have been paying income taxes on the accumulated interest each year.

Second, when the decedent died, the executor of the estate may have elected to include any of the accumulated interest in the decedent's last income tax return. For example, say the decedent bought a savings bond for $100 and it had grown to $180 when she died. If the decedent's executor elects to pay income taxes on the $80 of accumulated interest, the first $180 you get when you cash in the bond is tax-free.

Taxes After Cashing Bonds

If the decedent didn't include any of the interest in her income and estate, you're responsible for paying taxes on the interest when you cash out the bond. For example, say she bought the bond for $100 and had deferred paying any taxes on the accumulated interest until the bond matured. If she dies before it matures and the executor doesn't elect to pay income taxes on the interest, you're responsible for all of the taxes on the bonds when cashed in.

If the late person's estate includes Treasury securities worth $100,000 or more, a court must be involved in settling the estate. Otherwise, the heirs may be able to claim the bond using the Treasury Department's FS Form 5336.

You can claim a deduction for the amount of estate taxes paid on the interest that was included in the decedent's estate but not the decedent's income. For example, say the decedent paid $100 for the bond and it was worth $180 when she died, but didn't include any of that interest in his income. When you cash in the bond, you can deduct any estate taxes paid on that $80 of interest. The write-off is classified as a miscellaneous deduction not subject to the 2-percent-of-adjusted gross income limit.

Rules on Future Interest

Any interest that accumulates after the decedent dies is always included in your income when you cash in the bond. For example, say you inherit a bond that the decedent bought for $100 and is now worth $180. If you cash it in for $200 years later, you will pay taxes on the last $20 of interest, even if the decedent paid taxes on the first $80 of interest.

2019 Tax Law

The tax laws concerning savings bonds are unchanged for 2019 from the 2018 tax year. There is, however, a change in the maximum amount of money that's exempt from estate tax. The amount excluded from estate tax in 2019 is $11.4 million.

Tax Law Changes for 2018

With the passage of the Tax Cuts and Jobs Act in late 2017, the amount of money excluded from estate tax in 2018 jumped from 2017's $5.49 million to a whopping $11.18 million.