We’ve discovered several U.S. savings bonds that our deceased parents purchased in 1992. The bonds have accumulated substantial interest. Neither parent has an estate tax filed, as there were no other assets in their names. If we cashed these bonds, would we or their created estate owe taxes on the interest?

Your question touches on income taxes and estate taxes, which aren’t the same thing.

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Let’s start with income taxes. Interest on U.S. savings bonds is exempt from state and local income taxes, but it is subject to federal income tax. Bond owners can pay that income tax annually as interest accrues, or defer it until the bonds mature, are cashed, or change ownership. Almost everyone defers the tax, so it’s almost certainly still due on the interest you’ve inherited from your last surviving parent.

If you report that interest on the deceased bond owner’s final income tax return, the deceased’s estate pays the tax. If you’ve already filed the deceased owner’s final income tax return, each heir must pay the income tax on his or her share of the interest.

It sounds as if you’re also asking whether the existence of the bonds has made the estate of the deceased bond owner subject to estate taxes. The answer depends on the bonds’ total value and on when that person died.

A person’s estate is the value of everything he owned when he died. In 2017, federal estate tax is only levied on estates worth more than $5.49 million ($10.98 million for married couples). New York only taxes estates worth more than $5.250 million for state residents who die between April 1, 2017, and Dec. 31, 2018. Starting Jan. 1, 2019, the state’s estate tax exemption will equal the federal exemption, which is indexed to inflation.

THE BOTTOM LINE Interest on U.S. savings bonds is subject to federal income tax.

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WEBSITES WITH MORE INFORMATION

nwsdy.li/BondValue

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