Do you have a question about taxes or investing? You can write to me at beth.pinsker@marketwatch.com.
Dear Market Watch,
I have several mature EE savings bonds that I inherited from my mother as a payable-on-death beneficiary.
I refund a few of them each year to avoid paying a large amount of taxes at once.
What should I do if I want to get it back now and pay the tax — or withhold it — and not wait until I file my tax return in April?
Susan
Dear Susan,
Savings bonds are supposed to be a simple, safe investment, but more than 30 years later, it may not seem that way. EE bonds (and E bonds before them) were Series I bonds in their day – popular gifts for birthdays and college savings, but not so popular today when everyone is chasing high-yield investments.
Fortunately, you have certifications and a clear identification of ownership. Many people forget paper savings bonds, then don't pass them on to their heirs or don't give them instructions if they're found hidden in a box somewhere. In these cases, the bonds end up as unclaimed money, and you have to follow steps to find them and claim them as a legal heir, which can be stressful. The tool the Treasury Department uses to achieve this goal is called “Treasury Search.”
But there's one thing you should know: The tax on E/EE bonds is due when you cash them out or they reach their full maturity date (regardless of whether you hold them longer than that).
You could also have paid tax each year on the interest accrued, but the ship has clearly sailed on that. If you have your mother's E/EE bonds that are past their full 30-year maturity, you should have already paid tax on them. Since EE bonds have been issued since 1980, and E bonds from WWII until then, it is entirely possible to have some bonds that old. They also stop earning interest after 30 years, so there's no growth incentive to hold them.
Another thing to note: Savings bonds don't get a basis increase at death like stocks or other investments do. This means that you must pay tax on the entire amount of interest accrued on the bonds as the heir.
Penalties on old savings bonds
Cashing them all in now and dealing with the tax is probably a good way to start. Let's start with only those released in 1994 or later, as they will not include any penalty. The benefit will go on your 2024 taxes, which must be filed by April of the following year.
If cashing it now generates interest income that exceeds your normal tax burden, you must make an estimated tax payment at the time of the transaction. You can do this manually by mailing the estimated tax form with the payment. Through treasuredirect.gov, you can choose to have up to 50% of the interest you earn automatically deducted.
To determine the exact amount you'll owe up front, enter the serial numbers into the Treasury Department's online calculator. If you run the calculator without just the serial numbers and release date, you can get a number on the back of the envelope. For example, a $100 bond, purchased for $50 in February 1994, would have earned interest of $114.12 at its final maturity. The Internal Revenue Service notes in its instructions to estate managers that you may be able to deduct some of this interest income if you pay estate taxes on your mother's estate.
If you have bonds that have already matured, work with a tax professional to figure out the best way forward. “I don't know if the IRS would look the other way if I tried to extend this,” says David Ena, editor of Tipswatch.com. “If the energy efficiency bonds were issued in 1993 or earlier, there could be a fairly large interest, with taxes due.”
Solving the problem involves calculating the amount of interest due and then any penalty from the IRS, and may involve filing amended returns for the years in which the bonds reached maturity. Hopefully you have kept good records of transactions, but if not, be sure to note all dates and amounts going forward.
More about taxes
