Do I Have to Pay Tax on Inherited Savings Bonds?

Yes, you generally owe federal income tax on inherited savings bonds, but only on the interest the bonds have earned, not on the original purchase price. The tax on inherited savings bonds falls on whoever ends up reporting the accrued interest, and the law gives you a choice among three candidates: the decedent’s final return, the estate’s return, or your own return when you eventually cash the bond. Picking the right one can change the bill by thousands of dollars.

Why There’s No Step-Up in Basis

Most inherited assets get a favorable reset at death: the basis “steps up” to fair market value, wiping out built-in gain. Savings bonds don’t work that way. The IRS treats the accrued, untaxed interest as income in respect of a decedent, or IRD — income the original owner earned but never reported, which has to be taxed to somebody eventually.¹ Series E and EE bond interest held by a cash-method taxpayer is the textbook example of IRD under federal regulations.²

The practical effect catches people off guard. A parent who bought $10,000 in EE bonds twenty-five years ago might leave behind bonds now worth $25,000. The $15,000 difference is interest, and every dollar of it is taxable income to someone. The original purchase price is not taxed. The interest carries no exemption because the owner died.

Who Reports the Interest: Three Options

The executor or beneficiary gets to decide which taxpayer absorbs the hit.

The Decedent’s Final Return

The executor can elect to include all interest earned through the date of death on the decedent’s final Form 1040. If that election is made, you — the beneficiary — only owe tax on the interest that accrues after the date of death.¹ This works best when the decedent had low income in the year of death, putting the interest in a lower bracket than you would face.

The Estate’s Return

If the bonds pass through the estate, the estate can report the accrued interest on its fiduciary return (Form 1041). This path makes sense when the estate has deductions that offset the interest or when the beneficiary sits in a high bracket. Keep in mind that estates reach the top 37% federal rate at relatively modest income levels, so the math doesn’t always favor the estate.

Defer Until You Redeem

The most common choice is for the beneficiary to take ownership of the bonds and keep deferring the tax. No income is reported at the time of inheritance. You report all accrued interest later, when you redeem the bond or when it reaches final maturity.³ Deferral preserves tax-deferred compounding but concentrates a potentially large lump of income into a single tax year.

Picking the Option That Costs Least

The choice comes down to comparing marginal tax rates. For 2026, federal brackets for single filers run from 10% on the first $12,400 of taxable income up to 37% on income above $640,600. For married couples filing jointly, 37% kicks in above $768,700.⁴

Suppose a parent died mid-year with only $30,000 of other income, putting them in the 12% bracket as a single filer. The beneficiary earns $200,000 annually, placing the bond interest in the 32% bracket. On $15,000 of accrued interest, reporting on the decedent’s final return saves roughly $3,000 in federal tax compared to waiting for the beneficiary to cash out. The gap widens with larger bond holdings.

Deferral makes the most sense when you expect to be in a lower bracket in a future year — retirement, a sabbatical, a gap in employment — and can time the redemption accordingly. Holding also lets interest keep compounding tax-free, which has real value if the bond is still years from maturity. If you inherited several bonds, cashing some each year spreads the taxable interest across returns instead of stacking it in one.

To calculate how much accrued interest is actually at stake, TreasuryDirect’s Savings Bond Calculator will show the current value, interest earned, and maturity date for any Series EE, I, or E bond based on series, denomination, and issue date.⁵ Electronic bonds show their value directly in the TreasuryDirect account dashboard.

Avoiding Double Tax When the 1099-INT Arrives

This is where beneficiaries most often overpay. When you redeem an inherited bond, the paying agent issues a 1099-INT showing all interest earned over the bond’s entire life — including any portion already reported on the decedent’s final return.³ If you simply enter the 1099-INT amount, you’re paying tax twice on the same interest.

The fix: report the full 1099-INT amount on Schedule B, then subtract the portion previously reported by the decedent on a separate line with a notation like “interest previously reported by decedent.” Keep a copy of the decedent’s final return with the bond interest figure clearly identified. You may need it years after the death, when the memory of what was reported has faded.

The IRD Deduction (If Estate Tax Was Paid)

If the decedent’s estate was large enough to owe federal estate tax, the bond’s full redemption value was included in the taxable estate. The same interest dollars can then get hit twice — once by estate tax, once by income tax. Section 691(c) provides an income tax deduction to offset that overlap. You compare the estate tax actually paid to what the tax would have been if the IRD items had been excluded; the difference is the deduction, claimed as an itemized deduction on Schedule A by individuals or on Form 1041 by estates.¹

For 2026, the federal estate tax exemption is $15,000,000 per person.⁶ Only estates above that threshold trigger the issue, so the Section 691(c) deduction is irrelevant for most families. For taxable estates, the calculation is complicated enough to justify professional help.

Watch for Matured Bonds

Both Series EE and Series I bonds reach final maturity 30 years after their issue date and then stop earning interest entirely.⁷ A matured bond held in the drawer earns nothing and only delays a tax bill that’s already locked in. When an electronic bond matures in TreasuryDirect, the funds roll into a non-interest-bearing Certificate of Indebtedness and a 1099-INT is issued for the lifetime interest.³ Paper bonds past maturity just sit idle.

Before choosing to hold inherited bonds for continued deferral, check the issue date. A bond issued in 1996 matured in 2026. Anything older is already past maturity and should be redeemed promptly.

The Education Exclusion Does Not Apply

Beneficiaries sometimes assume they can use inherited bonds for a child’s tuition and skip the tax. They cannot. The education exclusion requires that the bonds were issued in your name (or jointly with your spouse) and that you were at least 24 years old when they were issued. Bonds inherited from a parent, grandparent, or anyone else fail the ownership test because they were originally issued in someone else’s name. Reissuing the bond in your name after death does not fix that. Inherited bonds are taxable regardless of what you spend the proceeds on.⁸

State Tax Treatment

Savings bond interest is exempt from state and local income tax, and that exemption survives inheritance.³ The bonds themselves can still fall under state estate or inheritance taxes, which are separate from income tax. Several states impose estate taxes with exemption thresholds well below the federal $15 million level, and a smaller group imposes inheritance taxes based on the beneficiary’s relationship to the decedent, with rates running from 0% for close relatives up to 18% for unrelated beneficiaries. Rules vary enough that your own state’s rules are worth a direct check.

Claiming the Bonds

If you are the surviving co-owner or named payable-on-death beneficiary on a paper bond, you can redeem it at most financial institutions with a certified death certificate and standard identification. To reissue a paper bond in your name rather than cash it, file FS Form 4000 with the death certificate; the reissued bond comes back as an electronic bond in a TreasuryDirect account, not a new paper certificate.⁹ Electronic bonds move through TreasuryDirect using FS Form 5511 (transfer) or 5512 (redemption), and individual bonds cannot be split between beneficiaries.

If no co-owner or beneficiary was named, the bonds pass through the decedent’s estate under the will or state intestacy rules. When the estate holds Treasury securities totaling more than $100,000 in redemption value at the date of death, a court-appointed representative is required to handle them.¹⁰ Financial institutions redeeming bonds in that situation typically ask for the death certificate and the letters of appointment for the estate representative.¹¹

Whatever path you take, hold onto the decedent’s bond records — purchase date, denomination, series — and any part of their final return that reported bond interest. Both pieces of paper become essential the year you finally redeem.

1
Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
2
eCFR. 26 CFR 1.691(a)-2 – Inclusion in Gross Income by Recipients
3
TreasuryDirect. Tax Information for EE and I Bonds
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
TreasuryDirect. Savings Bond Calculator
6
Internal Revenue Service. What’s New — Estate and Gift Tax
7
eCFR. 31 CFR Part 351 Subpart B – Maturities, Redemption Values, and Investment Yields of Series EE Savings Bonds
8
Internal Revenue Service. Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
9
TreasuryDirect. Inheriting as a Co-Owner or Beneficiary
10
TreasuryDirect. Death of a Savings Bond Owner
11
Federal Reserve Financial Services. Savings Bond Redemptions Frequently Asked Questions