Taxes on estate, then on beneficiary's estate wrt Savings Bonds

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Jack FFR1846
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Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

We met with a tax person today and being an engineer, who sees everything in a logical way, taxes are always a big mystery to me that make no sense. This situation is a bit different from the norm. I am hoping tax gurus here can either set me straight or tell me what's going on or maybe tell me to back away as the tax person is 100% right.

The situation

Two dead people are represented by DW who is executor (personal representative in my state). A pile of savings bonds were in the safe deposit box of the Aunt. They are all in the grandfather's name and he's been dead for nearly 30 years. Only heir was his daughter, the Aunt. She's been dead for over a year now. DW and her sister are her heirs.

Obviously, the savings bonds are way beyond the 30 years. Some are real war bonds from as far back as 1941. I did the hoop jumping to get these cashed and ACH'd into the grandfather's estate account under the EIN DW took out for him. About $75k with about $63k being interest.

On to the Aunt. Easier, I thought. Simple single savings bond in her name cashed and ACH'd into her estate account. About $900 interest.

First, what the tax person found while fumbling through her software, then I'll say why I'm concerned.

Grandfather's estate doesn't owe a dime in taxes to fed or the state.

Aunt owes something like $24k on the bond interest from the grandfather's bonds to the feds. Also owes state tax on this of about $3700. Aunt also owes fed tax on that $900 of her own bond but no tax to state on savings bond interest.

If this all looks correct and what the IRS does, ok, fine.

I had *assumed* that the grandfather's estate would owe the $24k to the feds and nothing to the state.
I had *assumed* that the aunt's estate would owe tax on the $900 interest on her bond (whatever that is) and nothing to the state.

Please don't use logic. My head works on logic. I cannot even do my own taxes as they aren't at all logical to me. I am considering asking my own tax person but thought someone here might talk to me like my dad would have when he was alive. He owned a tax business and was an enrolled agent and was enlisted by Turbo Tax to find their mistakes every year, which he always found. This info was from a person who DW's aunt had used, and was local so DW went with them)
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Makefile
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Makefile »

I can't speak to pre-EE and pre-I savings bonds, but the rule is that if the holder is using the default option to defer tax on the interest, they have to report the interest when the bond is redeemed or matures, whatever is earlier. See Publication 550. The fact that the holder left the bond laying in a drawer for an additional 30 years doesn't mean tax wasn't owed at maturity. Even the Treasury department seems confused by this; in this report on unredeemed savings bonds (https://treasuryhunt.gov/files/savings- ... report.pdf) they state without refuting it that some savings bond holders know they have matured bonds but don't redeem them due to tax consequences (see page 9).

That said, you can't really file a 1040-X for 30 years ago, and even if you could, you get a conflicting 1099-INT when you redeem the bonds. Even those who report the interest on time have to deal with this: if they elect to report interest annually (option 2) instead of deferring it, they still receive an incorrect 1099-INT at redemption that reports all the interest, and must follow a procedure given in Pub 550/1040 Schedule B to report it and then take out the interest already reported as a negative number.

So it would be interesting to see the all 1099-INT forms generated when you redeemed these bonds, and what the tax preparers put on 1040 Schedule B for each person involved.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

The interest treatment for a "regular person" is easy and understood.

What I don't get is why did the tax preparer (using their software) found zero tax for the grandparent? I was just thinking.....what if we had not gone in with the heir's tax to also do? Then it would have been a stand-alone tax filing for the grandfather with $63k in savings bond interest.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Even in the "simple" case of a single death and savings bonds that hadn't already matured and were known about at the time of death, taxation of US savings bonds after the death of a holder has a whole bunch of permutations, possible elections on various tax forms, and options.

You may have already found the available documentation, but...

Description and examples:

IRS Publication 559 (2021), Survivors, Executors, and Administrators -> U.S. savings bonds acquired from decedent

(The same information, perhaps using different words or examples, is available in the US Savings Bond section of Publication 550 "Investment Income and Expenses".)

There is a Treasury Direct page that gives a very high level overview and points to these publications: Death of a savings bond owner

Add in all the additional complications of your situation, and I don't think the general boglehead's public has any idea of what an IRS tax lawyer would say about how many of those options and elections still exist for grandfather's reopened (?) estate.
Last edited by cas on Tue Dec 06, 2022 8:42 am, edited 1 time in total.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by fabdog »

It would appear that the tax preparer is assigning all of the bonds to the aunt, as the heir of the grandfather. I'm not clear based on what you indicated if this is right or not. It all really depends on what has happened with the funds after the 2 passed away

You indicated that the bonds were all (except for 1) in the grandfathers name... no POD or beneficiary on the bonds. They were cashed in and the proceeds put into the grandfathers estate checking account, with TIN for the estate. When did the grandfather pass away? I'm assuming the estate is still open and no final return filed? When was his final 1040 return filed? It really belongs there, on his final 1040.

Where/when did the funds go from the grandfathers estate? If his final 1040 was filed and no amendment possible, then it likely does land with the aunt as heir... if she has a final 1040 available to land it on

It's not really a software problem, the software process what the preparer enters into it.

You may want to seek another opinion from a different tax preparer, one who has more experience perhaps with handling estates and multiple decedents, such as this one. If your spouse has a lawyer assisting in any part of this, they may have a recommendation for you.

I realize this probably doesn't get you all the way home on solving the issue. When I have these to prepare I usually end up creating flow charts both to help me be clear on what belongs where but also to help the heirs/administrators/representatives understand what landed where and why

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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Elle_N »

Jack FFR1846 wrote: Mon Dec 05, 2022 3:59 pm Aunt owes something like $24k on the bond interest from the grandfather's bonds to the feds.
Can you ask the tax preparer whether the bond interest was (or will be) assigned to the Aunt's final, year of death Form 1040? Or did the tax preparer assign the bond interest to the Aunt's estate income tax via Form 1041? Or did the tax preparer divide the interest between the two tax forms?

I quote what look like the most relevant sections of Pub 559 below. All I can conclude from these sections is that it's possible the OP's tax preparer was correct in having the bulk (and maybe all) of the income tax (on the savings bond interest) paid via attribution to either (1) the Aunt's year of death, final Form 1040; or (2) the Aunt's estate income tax Form 1041. That is, it's possible that legally, the bulk (and maybe all?) of the income tax is a debt of either the Aunt (via her final Form 1040) or of the estate or of both.

By my reading, I do not think all the income tax on all the interest should be paid from the Grandfather's side (meaning some combination of (1) the Grandfather's estate and (2) possibly an amended Form 1040 for the grandfather's year of death). Possibly the income tax on the interest the savings bonds earned up to the grandfather's date of death is attributable to the grandfather's estate or the grandfather's final Form 1040.

Are the bonds considered "Treasury bonds," such that they are distinguishable from series EE and series I U. S. savings bonds? I am stuck on this as well.


--- Excerpts from Pub 559 that seem relevant ---
U.S. savings bonds acquired from decedent. If series EE or series I U.S. 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. The transferee (estate or beneficiary) reports on its return only the interest earned after the date of death.
...
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, wasn't made, the interest earned to the date of death is income in respect of the decedent and isn't 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. In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid that arose because of the part of interest (if any) included in the decedent's estate.
.
.
.
Interest accrued on U.S. Treasury bonds. The interest accrued on U.S. Treasury bonds owned by a cash method taxpayer and redeemable for the payment of federal estate taxes that wasn't received as of the date of the individual's death is income in respect of a decedent. This interest isn't included in the decedent's final income tax return. The estate will treat such interest as taxable income in the tax year received if it chooses to redeem the U.S. Treasury bonds to pay federal estate taxes. If the person entitled to the bonds (by bequest, devise, or inheritance, or because of the death of the individual) receives them, that person will treat the accrued interest as taxable income in the year the interest is received. Interest that accrues on the U.S. Treasury bonds after the owner's death doesn't represent income in respect of a decedent. The interest, however, is taxable income and must be included in the income of the respective recipients.


Regarding 1099-Ints:
How to report. If you are preparing the decedent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099-INT on Schedule B (Form 1040), Interest and Ordinary Dividends. Next, enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you didn't receive Forms 1099. Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation.

Report dividend income for which you received a Form 1099-DIV on the appropriate schedule using the same procedure.




Note: As a layperson reads Pub 559, remember to distinguish between "estate income tax" and "estate tax." They are completely different.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Jack FFR1846 wrote: Mon Dec 05, 2022 3:59 pm
Aunt [. . .] Also ***owes state tax*** on this of about $3700. [. . .]

[. . .]

I had *assumed* that the grandfather's estate would owe the $24k to the feds ***and nothing to the state***.
I had *assumed* that the aunt's estate would owe tax on the $900 interest on her bond (whatever that is) ***and nothing to the state***.
I just clued in on the issue about the state tax. (emphasis within quote added by me.)

Yeah ... I don't see why any of the possible tax returns would owe state tax on the US savings bond interest. I don't see how the unresolved issue of exactly what federal tax return it lands on could possibly change its nature as US Savings Bond interest (exempt from state tax.)

Do you have an initial 1099-INT (from when you cashed them) showing the interest in Box 3 "Interest on US Treasury Obligations and Savings Bonds"? (as opposed to Box 1 "Interest Income")

If it is ok there (shows in Box 3), then you might have to follow the bouncing ball on how the income was officially shifted from one tax return to another (Schedule K-1?) ... watch to see if an inadvertent error/omission suddenly changed the character of the interest from specifically "Interest on US Treasury Obligations and Savings Bonds" to just general interest.

Let's see ... ah ... Looks like there is just a "Box 1" general interest box (with no specific separate box to designate US Treasury interest) on Schedule K-1. I've never prepared a Form 1041/Schedule K-1, so I'm not sure what was supposed to happen to keep the character of the US Treasury interest intact, but ... For my relatives that get a Schedule K-1 from a trust ... often there has to be a code in Box 14 or an attached statement in order for all necessary information to be passed to the receiver. (But my relatives aren't getting US Treasury interest, so I don't know what is supposed to happen for that specific type of income on a K-1.)
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

cas wrote: Tue Dec 06, 2022 11:09 am
Let's see ... ah ... Looks like there is just a "Box 1" general interest box (with no specific separate box to designate US Treasury interest) on Schedule K-1. I've never prepared a Form 1041/Schedule K-1, so I'm not sure what was supposed to happen to keep the character of the US Treasury interest intact, but ... For my relatives that get a Schedule K-1 from a trust ... often there has to be a code in Box 14 or an attached statement in order for all necessary information to be passed to the receiver. (But my relatives aren't getting US Treasury interest, so I don't know what is supposed to happen for that specific type of income on a K-1.)
Here's a Turbotax forum discussion on this issue: https://ttlc.intuit.com/community/taxes ... 00/2098743

(Read all 8 comments because different people are seeing different things on their K-1s.)

The broader takeaway is that, when income is bouncing from tax return to tax return during estate administration, it seems to be easy to loose track of the US Savings Bond/state-tax-exempt nature of the savings bond interest ... leading to state taxation that shouldn't happen. I suspect your accountant does need to be prodded on that point.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

If nothing else, this discussion has eased my mind that it is possible that the tax treatment by our tax person may actually be correct. I'll add facts.

Grandfather passed in 1987.
Aunt passed December 2020.
Aunt's final tax return was filed for tax year 2020.

Bonds were cashed in 2021. Bonds were ACH'd into the estate of the grandfather for most and Aunt for a single bond with her name. Money was transferred from grandfather's estate account to Aunt's estate account in 2022.

Names on the E and EE bonds (what they all were) were grandfather and his predeceased wife and for the Aunt on the single bond.

We have seen no -int statements. We have not attempted to deal with Treasury Direct, seeing reports of emails getting responses like "we're so busy, we are not responding to emails".

No FINAL tax returns are filed.

Our current work is to file the final tax return for the Grandfather's estate. This is a tax year 2021 return. I'll add that grandfather's probate estate was re-opened when the bonds were discovered in 2021.
Aunt's return is for 2021 and is NOT final as there will need to be a 2022 tax year return. I do remember this being told us. I don't know why.

Thanks all of you for your input.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Jack FFR1846 wrote: Tue Dec 06, 2022 12:29 pm
Bonds were cashed in 2021. Bonds were ACH'd into the estate of the grandfather for most and Aunt for a single bond with her name.

We have seen no -int statements. We have not attempted to deal with Treasury Direct, [. . .]
There seem to be missing 1099-INT statement(s) then (if the bonds were redeemed in 2021. It/they should have been produced in early 2022.)

How exactly is Treasury Direct involved?

Not at all? (i.e. a brick-and-mortar bank dealt with redeeming the savings bonds?) (in that case, the bank should have produced the 1099-INT and probably mailed it to whatever address was known. I've heard of it being handed over in person at the time of savings bond redemption, though.)

Or were the paper savings bonds converted to electronic bonds within a Treasury Direct account before being cashed? In that case, apparently you have to go retrieve the 1099-INT from the TD account. They don't snail mail them.

Or via Treasury Direct paper form sent in with the paper savings bonds, where the paper form directed the proceed be deposited directly into the estate's bank account? (I would assume TD would be responsible for producing the 1099-INT in that case, but I have no idea if they snail mail or ?? )
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

Because it was an estate, I had to send the form, executor statement from the court, EIN all to Treasury Direct along with all the paper bonds. We have never received any paper anything from Treasury Direct, but not surprising because my understanding is that if someone wants a 1099 from them, they have to go on line. We have no online accounts for the estates. TD ACH'd the money directly into the estate accounts, 6 weeks after mailing.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Makefile »

Jack FFR1846 wrote: Tue Dec 06, 2022 3:52 pm Because it was an estate, I had to send the form, executor statement from the court, EIN all to Treasury Direct along with all the paper bonds. We have never received any paper anything from Treasury Direct, but not surprising because my understanding is that if someone wants a 1099 from them, they have to go on line. We have no online accounts for the estates. TD ACH'd the money directly into the estate accounts, 6 weeks after mailing.
Just for clarity, redeeming a paper savings bond by mail isn't necessary "TreasuryDirect". They still send out paper 1099-INTs at year end for such transactions. Those holdouts who still have the last few batches of unmatured Series HH bonds (with semiannual interest payments) also get them.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

For bonds in the name of a dead person, they have to be mailed to TD. I would have loved to have gone to DCU and cashed them like I do my own. DW is executor.

I also just looked at the TD site and it says that those with paper bonds get mailed a 1099 when the bond matures. Holy Cow! So does that mean that the grandfather paid taxes based on those 1099's long ago? A good portion of the bonds were 30 or more years old when he passed in 1987.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Makefile »

Jack FFR1846 wrote: Tue Dec 06, 2022 3:59 pm For bonds in the name of a dead person, they have to be mailed to TD. I would have loved to have gone to DCU and cashed them like I do my own. DW is executor.

I also just looked at the TD site and it says that those with paper bonds get mailed a 1099 when the bond matures. Holy Cow! So does that mean that the grandfather paid taxes based on those 1099's long ago? A good portion of the bonds were 30 or more years old when he passed in 1987.
I guess what I'm saying is with the exception of those transactions that involve transferring a bond into TreasuryDirect (such as converting a paper bond or reissuing it with a different title) you mailed the bonds and form to the Bureau of the Fiscal Service, not TreasuryDirect, and the transaction you did didn't require a TreasuryDirect account number to put an electronic 1099-INT into even if they didn't want to send you a paper one.

I see that language about automatic 1099-INT at maturity of paper bonds, too, and I don't think it's true and definitely wasn't true back in 1987.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Elle_N »

Jack FFR1846 wrote: Tue Dec 06, 2022 3:59 pm I also just looked at the TD site and it says that those with paper bonds get mailed a 1099 when the bond matures. Holy Cow! So does that mean that the grandfather paid taxes based on those 1099's long ago? A good portion of the bonds were 30 or more years old when he passed in 1987.
I was checking on the E and EE bonds you mentioned. Per https://treasurydirect.gov/forms/sec0050.pdf, and depending on the date issued, the E bonds stopped earning interest after either 30 years or 40 years. The EE bonds stopped earning interest after 30 years. (Both bonds appear to me to meet the definition of "Treasury Bonds," due to maturing after 20 years.)

This means a lot (maybe all) of the interest was earned (though not paid to the grandfather) while grandfather was alive. After he died, it's possible the bonds had already ceased to earn interest.

For the bonds that reached final maturity before the grandfather died, and if the grandfather never paid taxes on these bonds' interest during his life, then Pub 559 seems to me to point to the Aunt paying the income taxes (either via the Aunt's final 1040; a 1040-X; or the Aunt's estate's 1041).

As noted above, the 1099-INTs issued could be interesting.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

I plan to request 1099's from TD and income tax transcripts from the IRS. This could be interesting. It also may not be as clear cut as I hope. Would a 1941 E bond at maturity have generated a 1099 back then? I don't know.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Jack FFR1846 wrote: Tue Dec 06, 2022 5:26 pm I plan to request 1099's from TD and income tax transcripts from the IRS. This could be interesting. It also may not be as clear cut as I hope. Would a 1941 E bond at maturity have generated a 1099 back then? I don't know.
I've never seen any indication on Bogleheads of anyone ever getting a 1099-INT in the mail out of the blue for a paper US savings bond they had forgotten about. I've seen a lot of evidence of the opposite ... posts asking how to deal with the 1099-INT that they got when they redeemed a suddenly-found bond that actually had matured years prior.

From the US Savings Bond section in IRS Publication 550:
Form 1099-INT for U.S. savings bond interest.

When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the
amount paid for the bond. [ . ..]
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Elle_N »

Jack FFR1846 wrote: Tue Dec 06, 2022 3:59 pm I also just looked at the TD site and it says that those with paper bonds get mailed a 1099 when the bond matures.
Got a link? So far everything I see says the 1099-INT is issued after the bond is redeemed.

The IRS site says old tax returns are "generally available" for the last six years. Tax transcripts are available going back nine years. I am not optimistic that you can get the grandfather's tax records dating before 1987, unless the family has them in storage somewhere.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

So somewhat of an update as I learn more.

I thought we might be on to some savings as a mailed 1099 for a mature bond would have triggered inclusion in the grandfather's tax return for that year. Well, that may have indeed happened, but there was not a lot of interest before his death. In about a 4 year period, a bit over $1k in interest.

So the majority of these 1099s sent at maturity would have been in the grandfather's name, mailed to the Aunt who, knowing her, would have been thrown in the trash. That would be another $62k in interest.

So a question. I did some math and $24k in tax on $63k in interest for the estate....38% seems wicked high. Is tax on an estate somehow higher than on an individual?
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Makefile »

Jack FFR1846 wrote: Fri Dec 09, 2022 3:20 pm So somewhat of an update as I learn more.

I thought we might be on to some savings as a mailed 1099 for a mature bond would have triggered inclusion in the grandfather's tax return for that year. Well, that may have indeed happened, but there was not a lot of interest before his death. In about a 4 year period, a bit over $1k in interest.

So the majority of these 1099s sent at maturity would have been in the grandfather's name, mailed to the Aunt who, knowing her, would have been thrown in the trash. That would be another $62k in interest.

So a question. I did some math and $24k in tax on $63k in interest for the estate....38% seems wicked high. Is tax on an estate somehow higher than on an individual?
I realize that you found the quote on the treasurydirect.gov website claiming that owning a matured Savings Bond automatically triggers a 1099-INT form to be sent to you. But even if that is true now, and I don't think it is, it was not true historically. And there are a lot of paper Savings Bond owners here who can attest. Savings Bonds didn't even have an SSN included until the mid-1970s. Plus the Treasury is on record saying that pre-1990ish Savings Bonds (which were hand-keyed on multi-part forms on a typewriter at the institution where you bought them and not centrally printed) have such a variable format that they haven't yet developed a way to make them machine readable to try and chase down owners of old, matured bonds.

Estates can pass-through taxable income to the beneficiaries instead of paying those rates. The estate and trust tax brackets are set up that way to deter the "rich" from setting up a bunch of trusts to get around the progressive individual income tax system.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Makefile wrote: Fri Dec 09, 2022 3:25 pm I realize that you found the quote on the treasurydirect.gov website claiming that owning a matured Savings Bond automatically triggers a 1099-INT form to be sent to you. But even if that is true now, and I don't think it is, it was not true historically. And there are a lot of paper Savings Bond owners here who can attest.
I have a suspicion that the possible 1099-INT(s) you are really interested in are the possible *Tax Year 2021* 1099-INT(s) that may have been reported to the IRS as being associated with the EINs of the respective estate(s). (You previously said, IIRC, that you submitted estate-type paperwork to Treasury to cause the savings bonds to be cashed in 2021 ... and that they were deposited to estate checking accounts .... the majority to grandfather's estate checking account, but also a small amount to aunt's estate checking account).

*If* the IRS has Tax Year 2021 1099-INTs that were reported to it for the estate EINs, and *if* their computer thinks the timing was such that you are late filing one or more (due to 2 open estates) *2021* Form 1041(s) (Form 1041 = estate income tax return), then I have to suspect that that is eventually probably going to show up as an unpleasant IRS letter. (Please note that there are quite a few "if"s in the previous sentence.)

I don't know if it is possible to get IRS transcripts for an EIN to see if the IRS knows about any 1099-INTs.
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Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Elle_N »

Jack FFR1846 wrote: Fri Dec 09, 2022 3:20 pmSo a question. I did some math and $24k in tax on $63k in interest for the estate....38% seems wicked high. Is tax on an estate somehow higher than on an individual?
If the Aunt died in 2021, I believe the 2021 estate income tax rates apply. But don't quote me on this. For estate taxable income over $13,050, the 2021 estate income tax would be $3,146 plus 37 percent of the excess over $13,050.

I too am wondering if this interest income could (should?) have been passed to the beneficiaries (your wife and your wife's sister) via a Form K-1, resulting in this interest being taxable at the wife and wife's sister's income tax rates.
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Jack FFR1846
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Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

In digging further, I've found that the bonds were actually cashed early in 2022. Sorry for the mistake. We're reviewing all the information and found this. I had been just along for the ride, so to speak before and I'm not sure how we thought that this happened in 2021. If nothing else, at least we're not late with a tax return.

I spoke with Treasury Direct, looking for how long they had been sending 1099-int and with research, they came back and told me that the sending pre-dates the existence of Treasury Direct and that "back then", they would have mailed 1099's. Not sure how they do it now, but thinking that it is simply available in one's online account.

On another note, since I would not want to put my kids through this, I'm rethinking what money we'll use first when we retire (next year). We have over $400k in savings bonds. I guess I'll have to go through and see which ones don't have one of our kids' names on them and target them to cash.

We clearly are not good at this. DW is going to ask her father to make her sister executor of his estate.

We're thinking of dumping this tax preparer (known as someone around the Block) and going with a CPA.
Bogle: Smart Beta is stupid
cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Elle_N wrote: Fri Dec 09, 2022 4:23 pm If the Aunt died in 2021, I believe the 2021 estate income tax rates apply. But don't quote me on this. For estate taxable income over $13,050, the 2021 estate income tax would be $3,146 plus 37 percent of the excess over $13,050.
Plus the 3.8% Net Investment Income Tax would start applying to savings bond interest at some low Form1041-style MAGI.
cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Jack FFR1846 wrote: Fri Dec 09, 2022 4:29 pm We clearly are not good at this.
I wouldn't beat yourself up about anything. You're dealing with a major edge case. US Savings Bonds after death of an owner are weird to start with. Then you have the multiple generations of "whoops. They were in a box in the attic and nobody knew."

I'm glad the savings bonds were cashed in 2022, and there is no "missing" 1099-INT.
cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by cas »

Not An Expert. But we're getting close to the end of 2022, so I'm going to risk opening mouth and inserting foot.

Has anything been distributed from the estate(s) to your wife and her sister yet in 2022?

If you want to transfer the tax responsibility for that savings bond interest from the estate tax return (via Form 1041/Schedule K-1) to your wife and her sister's income tax returns (usual Form 1040), I think at least the interest amount needs to be distributed to them during the estate's 2022 tax year. (But I think there may be situations where an estate's tax year might not be the calendar year.)

(And if you were sharpening your pencil for Roth conversions or anything, be aware of potential incoming income.)
Topic Author
Jack FFR1846
Posts: 18499
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Taxes on estate, then on beneficiary's estate wrt Savings Bonds

Post by Jack FFR1846 »

.......and while late, cas had a key question which I only learned speaking with our REAL CPA this time instead of an initial, name like Ken Block did trying to make her software do the work.

The bonds were cashed in 2022. A distribution WAS made in 2022 which exceeded the amount of the bond interest. So.....ta da! No tax for grandfather's estate, no tax for aunt's estate, flying K1's as far as the eye can see and instead of paying 39% tax, the income (interest) will hit DW and her sister (heirs) and since we're both in 22 to 24% ranges, we all dance around with a big win, paying the tax. For me, this means we have to do an amended return because I get my taxes done as soon as possible. But 24% is way better than 39%.
Bogle: Smart Beta is stupid
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