I inherited $70,000 in savings bonds from my late mother. How do I avoid tax problems when cashing them in?

I have been redeeming a few every year to avoid paying a large amount of taxes at one time.

What should I do if I want to redeem them now and pay the tax — or have it withheld — and not wait until I file my tax return in April? 

Susan 

Dear Susan, 

Savings bonds are supposed to be a simple, secure investment, but 30-plus years later, it probably doesn’t seem that way. EE bonds (and E bonds before them) were the Series I bonds of their day – popular gifts for birthdays and college savings, but not so prevalent today when everyone is chasing after high-yield investments. 

Fortunately, you have the certificates and a clear designation of ownership. A lot of people forget about paper savings bonds, and then either don’t pass them along to their heirs or don’t provide instructions for them if they are found stashed in a box somewhere. In those cases, the bonds end up as unclaimed funds, and you have to go through the steps to find them and claim them as a legitimate heir, which might be cumbersome. The Treasury’s tool for this is aptly named “Treasury Hunt.”

But here’s one thing you should know: The tax on E/EE bonds is due when you cash them or they reach their full maturity (regardless of whether you hold them longer than that).

You could also have paid the tax each year on the interest as it accumulated, but the ship has obviously sailed on that. If you have E/EE bonds of your mother’s that are past their full 30-year maturity date, you should have already paid the tax on them. Since EE bonds have been issued since 1980, and E bonds from World War II until then, it’s entirely possible that you have some that are that old. They also stop earning interest after that 30-year mark, so there’s no growth incentive for holding onto them. 

Another thing to note: Savings bonds don’t get a step-up in basis at death the way stocks or other investments do. That means you have to pay tax on the full amount of interest due on the bonds as the inheritor. 

Penalties on old savings bonds

Cashing them all in now and dealing with the tax is probably a good way to go. Let’s start with just ones that were issued in 1994 or later, where no penalty would be involved. The interest would hit your 2024 taxes, which would have to be filed by April of the following year. 

If cashing them out now generates interest income that is a significant amount above your normal tax burden, you should make an estimated tax payment at the time of the transaction. You can do this manually by mailing an estimated tax form with a payment. Via Treasurydirect.gov you can elect to withhold automatically up to 50% of the interest you earn. 

To determine the exact amount you’ll owe in advance, input the serial numbers into the Treasury’s online calculator. If you run the calculator without the serial numbers and just an issue date, you can get a back-of-the-envelope number. For instance, a $100 EE bond, bought for $50 in February 1994, would have accrued $114.12 in interest at its final maturity. The Internal Revenue Service notes in its instructions for estate administrators that you may be able to deduct some of this interest income if you paid 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 will look the other way if you try to stretch this out,” says David Enna, editor of Tipswatch.com. “If they were EE bonds that were issued in 1993 or before, there could be a fairly sizable interest coming, with taxes due.”

Fixing the problem will involve calculating the interest amount owed and then any IRS penalty, and it may involve filing amended returns for the years where the bonds came to maturity. Hopefully, you kept good records of the transactions, but if not, be sure to note all the dates and amounts going forward. 

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