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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4544
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hello! Ive got what a tricky question for you - I think.

Resolved Question:

Hello!
I've got what a tricky question for you - I think. My dad passed away in 2010. He had 267 EE Savings Bonds at different levels of maturity. The original cost of the bonds was $15,550. Their current value is $84,341 and my dad did not pay annual taxes on the accumulating bond interest. The executor of the estate has just now filed the 2010 personal income tax return for my dad and the 2011 estate tax return but did not include the bond interest in either. Can you tell me what the tax rate on the interest will be on the 2012 tax return and what will the IRS penalties be?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

 

Lev :

Hi and welcome to Just Answer!
As a general rule - interest from coupons on the decedent's bonds is constructively received by the decedent if the coupons matured in the decedent's final tax year, but had not been cashed. Include the interest income on the final return.
Specifically for series EE or series I US savings bonds, owned by a cash method taxpayer who reported the interest each year, or by an accrual method taxpayer are transferred because of death, the increase in value of the bonds (interest earned) in the year of death up to the date of death must be reported on the decedent's final
return.
If the bonds transferred because of death were owned by a cash method taxpayer who chose not to report the interest each year and had purchased the bonds entirely with personal funds, interest earned before death must be reported in one of the following ways.
1. The person (executor, administrator, etc.) who is required to file the decedent's final income tax return can elect to include all of the interest earned on the bonds before the decedent's death on the return. The transferee (estate or beneficiary) then includes only the interest earned after the date of death on its return.
2. If the election in (1), above, was not made, the interest earned to the date of death is income in respect of the decedent and is not included on the decedent's final return. In this case, all of the interest earned before and after the decedent's death is income to the transferee (estate or beneficiary).
A transferee who uses the cash method of accounting and who has chosen not to report the interest annually may defer reporting any of it as income until the bonds are either cashed or reach the date of maturity, whichever is earlier.
So far - if you choose to redeem all bonds in 2013 - the interest is reported on your 2013 tax return (not 2012 tax return).
The actual tax liability is based on your total income - the taxable interest is added to your other taxable income. You may review tax rate schedule on the last page of this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf

As long as the interest is reported in the year of maturity or the year or redemption - there is no penalty.
Please be aware that the interest is not taxable on your state income tax return.

Lev41490.6876859259
Expert:  Lane replied 1 year ago.

I have a different answer:

When the bond owner dies, the accrued interest may be treated as income in respect of a decedent.

In that case, the new owner of the bonds becomes responsible for the tax on the interest accrued during the life of the decedent. (The tax isn't due, however, until the new owner cashes in the bonds.)

The executor CAN go back and amend to report on the decedent's final income tax return. That could be a tax-saving choice if he or she is in a lower tax bracket than the beneficiary. If that method is chosen, the person who gets the bonds only includes in his or her income the interest earned after the date of death.

But, to answer your question, no taxes are owed until the bonds are cashed,in your situation.

You can do this by going to a bank. They will give you a 1099 shortly after the transaction OR withing two months after the following January, so you can include it in your income for that year.

SO, NO penalties, AND they aren't taxable until you cash them in, AND you don't have to cash them all in at the same time.

Hope this helps

Lane

Customer: replied 1 year ago.

Thank you for the quick reply. My apologies herewith for not understanding some of the legal terminology that you've used in your answer to my question - and which, therefore, has clouded my comprehension of your answer. My understanding of the tax return process associated with my dad's death and his estate is that: (1) A personal income tax return for 2010, the year of his death, should have been filed by April 15th, 2011, and the savings bonds could have been cashed out and included as income on that return. (2) Following his death, an estate account was created to deal with any estate tax issues that arose following his death - and it was into this account that the monies from the savings bonds was just deposited by the Executor of the Estate in this year. (3) Income on an Estate Tax Return is taxed at a different rate than on a Personal Income Tax Return - with any income exceeding a total of approximately $11,000 being taxed at a rate of 35%.


......Hence, inasmuch as the interest income on the savings bonds was not declared on the 2010 Personal Income Tax Return for my father, nor on the 2011 Estate Tax Return but will, instead, be declared on the 2012 Estate Tax Return - it appears to me that it will be taxed at the rate of 35%. Is this correct?


Additionally, inasmuch as the savings bonds were cashed in near the end of last year (i.e., 2012) and the monies added to the Estate Account - and the 2012 tax return is being filed late this year, without an extension having been filed for, with no estimated taxes having been paid by April 15th - it appears to me that there will be penalties for having filed the tax return late and for not having made an on-time payment for the estimated tax on the income of the savings bond interest. The penalties for filing late (without an extension) and for having not paid an estimated tax on time appears to be as much as 25% of the total tax that was due - with an interest charge of 3%. Is this correct?

Expert:  Lane replied 1 year ago.


You have it, exactly.

Customer: replied 1 year ago.

Thank you very, very much! - One last and final quick question: There is a possibility that the Executor of my dad's estate did not cash in his savings bonds and deposit them into the Estate Account until the first part of January 2013. If this should happen to be the case and the income from the interest on the savings bonds is declared and filed on time with the 2013 Estate Tax Return (and is paid on time), then there should be no penalties for late filing or late payment - correct?

Customer: replied 1 year ago.

Hello! I received a "pop-up" window that said a tax expert needed to chat with me about my last question. However, when I clicked on the button to begin the chat - nothing happened. Do I need to continue waiting for the "chat" to begin?

Expert:  Lane replied 1 year ago.

That's right (not sure about the chat box) ... But yes, if they were not cashed until 2013, that would reported on a 2013 return... No penalties

Hope this helps

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4544
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 7 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thank you so very much! You've been a great help.


Have a wonderful day!


 


Sincerely Yours: Tracy

Expert:  Lane replied 1 year ago.


You too Tracy.

Thanks so much.

Lane

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Lane
Lane
JD, MBA, CFP, CRPS
3669 Satisfied Customers
Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986