03 Jun Can I avoid a tax bill when I cash savings bonds?

Q. My mother recently passed away and I inherited matured savings bonds that are from her and my grandmother. The face value is about $50,000 and the total is about $200,000 with interest. I am sending them out to be cashed. Is there any way to avoid a large tax bill next year when I file my taxes due to the $150,000 earned in interest?
— Heir

A. We’re sorry to hear about the loss of your mother.

There are a few things to consider regarding the taxation on these bonds.

The interest accumulated on the savings bonds won’t be taxed when you cash in the bonds if it was included in your mom’s taxable income, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

For example, he said, your mom may have been paying income taxes on the accumulated interest each year. If not, when she died, the executor of the estate could have included any of the accumulated interest in her last income tax return, Sarnecki said.

Say bought a savings bond for $100 and it had grown to $150 when she died. If the executor pays income taxes on the $50 of accumulated interest, the first $150 you get when you cash in the bond is tax-free, he said.

But if this was not the case, unfortunately you’re responsible for paying taxes on the interest when you cash out the bond.

One option you can consider is selling half the bonds this year and the remainder in January of 2022, splitting the taxes out over two years, he said. If applicable, you can always look at other tax saving strategies, such as maximizing traditional IRA and 401(k) account contributions to lower your overall taxable income, he said.

Keep in mind that you can claim a deduction for the amount of estate taxes paid on the interest that was included in the decedent’s estate but not the decedent’s income, Sarnecki said.

“For example, say the decedent paid $100 for the bond and it was worth $150 when she died, but didn’t include any of that interest in her income. When you cash in the bond, you can deduct any estate taxes paid on that $50 of interest,” he said.

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This story was originally published on June 3, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.