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Posted by A.G. Kalman on March 1, 2007, 7:06 am
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Fred J. Tydeman wrote:
> When a single person dies, is there a stepup in basis on EE
> bonds?
>
> If yes, then I assume that there is no income tax on the
> deferred interest.
>
> If not, then would the interest earned be taxable income on:
> that person's final income tax return (1040);
> that person's estate income tax return (1041); or
> the income tax return of the person who inherites those
> EE bonds?
Your answer is in IRS Pub 550 (with examples) starting on
page 9. Basically, someone is going to pay tax on all the
interest. Assuming that the decedent had not elected to
declare as taxable the interest that had been accruing each
year (in all my years I have never come across an individual
who did this), then the interest that had been accruing
since the bonds were purchased becomes IRD (income in
respect of the decedent). The new owner of the bonds will
pay tax on all the interest when the bond is sold unless the
new owner elects to declare all the accrued interest as
income in the year that ownership changes. The one
exception to this is if the person settling the estate
elects to declare the accrued interest on the final income
tax return of the decedent. Then the new owner would only
pay tax on interest earned after the death. No matter how
you slice it or dice it, the interest is going on someone's
tax return eventually.
--
Alan
http://taxtopics.net
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