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Ibond Income With Respect To Decedent And Accruel Method Starting.

Ltssharon
  |     |   472 posts since 2020

Hi all. This is just food for thought. When I go to my tax preparer at the end of February I will have more to share. This is as far as I know. I hope it inspires some of you.

1)If you have inherited some ibonds, and if the person you inherited them from did not pay taxes on the interest every year while that person was alive, YOU owe the taxes on that income, even for the years that now deceased person was alive.

2) When you go ahead and decide to begin paying taxes on your personally bought and inherited ibonds, I THINK and WILL FIND OUT, that you can have a chance to get a DEDUCTION to put on you ITEMIZED deduction. The deduction would be the amount of interest that the INHERITED ibonds earned from the issue date of those INHERITED IBONDS to the DATE OF DEATH of the person from whom you inherited those ibonds. that Deduction would be called:income with respect to decedent. You would only get that Income with respect to decedent the very first year you start paying taxes on the interest (started using the accruel method), not in any following years.

3) YOu have to keep your own records.

3) I have a point of confusion that I will discuss with my tax preparer. I vaguely remember something about a 3 year limit of something or another. I am very vague on it as of now. Sorry.

4) I promise I will follow up on this after I see my tax preparer.

5. Meanwhile, if you inherited ibonds and are switching to the accruel (pay as you go) method of paying taxes on interest earned in Ibonds, LOOK INTO THIS.

It is a learn as you go process for me. I have received helpful tips to get me started. Particularly helpful was advice from someone here that I should go to IRS publication 550, pages 7 and 8.

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Choice
  |     |   937 posts since 2020
Talk to the guru...Thefinancebuff.com
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w00d00w
  |     |   360 posts since 2012
after looking at IRS Pub 559, if the decedent's final tax return includes as income all accrued interest (up to the date of death) that had not yet been taxed on the savings bond(s), then the beneficiary would not need to pay any tax on that amount. that seems like the most straightforward way to handle the transition of ownership, from a tax perspective. for current savings bond owners, perhaps a useful instruction to leave a future executor.

thanks for sharing, and let us know how it goes.
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Ltssharon
  |     |   472 posts since 2020
I think you are mistaken. the if the original owner did not pay taxes on that interest, then I think the beneficiary 1( does pay the taxes from date of original issue forward), and 1( can use the interest as a deduction). Time will tell. I hope my tax preparer actually knows the answer. I will keep everyone updated. Of course w00d00w I would LOVE for you to be correct.
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MY2CENTSWORTH
  |     |   440 posts since 2016
I have not looked into Pub 559, but Ltssharon, what w00d00w makes a lot of sense...if the decedents final/estate tax return adds all Ibond accrued interest up to date of death, there would be no reason for any beneficiaries to concern themselves with any interest until the period beginning and forward on the decedents date of death.
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alan1
  |     |   880 posts since 2015
Please read IRS Publication 550, including the subsection titled "Decedent who postponed reporting interest.", beginning at p. 8, col. 3 and concluding on p. 9. But please do not read the subsection in isolation; it needs to be read in conjunction with other material.
https://www.irs.gov/pub/irs-pdf/p550.pdf
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Ltssharon
  |     |   472 posts since 2020
Alan 1, ok, thanks for the tip, and oh my, I also just now went to publication 559, and decided I know nothing, absolutely nothing about income with respect to decedents. Each word in publication 559 and 550 sends my brain whirling.
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CuriousDave
  |     |   233 posts since 2018
The I-Bond interest which was previously taxed to a decedent who chose to report interest annually is - fortunately - not an “itemized” deduction for surviving beneficiaries. Fortunately, because only approximately 10% of all taxpayers have aggregated itemized deductions that are greater than their standard deduction, and the tax savings from itemized deductions will never be more than the tax on the difference between itemized deductions and the applicable standard deduction that the taxpayer would get without itemizing. The previously reported interest is subtracted (shown separately as a negative amount on line 1 of Form 1040, Schedule B, and not to be confused with line 3) from the total amount reported by the U.S. Treasury on Form 1099-INT, so in effect only the untaxed portion is included in “Adjusted Gross Income” AGI) and in “Taxable Income.” That treatment, as opposed to itemizing, makes a big difference to many taxpayers who receive Social Security benefits, as the portion of those benefits that are subject to federal income tax is based on a formula that starts with AGI. It also makes a difference to any taxpayer with other tax situations that are based on the AGI amount, including those few who are able to benefit from (ironically) itemizing their medical deductions, which are limited to the excess of the aggregate of those expenses over 7.5% of AGI.
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