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Okay, for you informed people out there maybe you can help me. My mother is receiving savings bonds from my grandfather who recently died. She was named on the bonds as payable on death. I know our state does not levy inheritance taxes and the value of my grandfather's estate is most likely under the exemption level. Our question though is whether or not the interest on the savings bonds is taxable. From what I am able to find the beneficiary has to pay income taxes on the interest on the bonds unless they claim the interest on my grandfather's last tax return, which would be filed for 2005. Is my understanding correct? My mom is trying to figure out to pay the least amount of taxes so that she can use the money to give as gifts to her children and to pay off some of her debts. Any ideas? Am I understanding the whole bond interest thing correctly? Thanks!
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quote:If the bonds are in your name, you'll owe income tax on the difference between the purchase price and the bond's redemption value when you finally cash them in. There are a couple of ways to get around — or at least postpone — such taxes. One is to roll your Series EE bonds over to Series HH bonds. (See our previous "Ask SmartMoney" for details.) Or, depending on when the bonds were issued and your income, you may be able to get out of taxes by using the bond for a child's college education. Log onto the Bureau of the Public Debt's Web site for more.
If the bonds are in your mother's name, you have two choices. You can have your mother's estate pay the income tax on interest that accrued up to the date of her death. That would make sense if your mother was in a lower tax bracket than you, says Daniel Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything in Between." As the recipient of those bonds, you would then be taxed only on interest earned after your mother's death. The second option would be to leave the interest off your mother's final income tax report. You and any other bond recipients would then be responsible for the total tab.
What you should really watch out for is estate tax. Estate taxes could take a bigger bite of your mother's holdings than plain old income tax. Rates start at 37% and are assessed on everything in your mother's taxable estate after the first $675,000. You'll need to calculate the value of your mother's estate, including real estate, cash, securities and, of course, any bonds in your mother's name. Bonds purchased in your and your children's names shouldn't be included (assuming she abided by the rules for nontaxable gifts), says Robert Tull, a certified financial planner specializing in trusts and estates. You can use the savings-bond calculator or the Savings Bond Wizard to value the bonds. If your mother's estate exceeds the $675,000 cutoff, you might be entitled to a deduction when you redeem and are taxed on the bonds. Talk to a tax professional. For more on inheriting savings bonds, see our previous "Ask SmartMoney."
Of course, if you did your research on line, then I'm sure you found these. So I don't know if this actually helps - I've got no firsthand knowledge. But it seems pretty straightforward.
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Thanks Dag I'll pass those links on to my mom.
Since my grandma is still alive and she got the bulk of the estate I'm not sure how the taxes and such will work. Hopefully my mom's attorney knows or can refer her to someone.
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