When you withdraw money to pay for qualified education expenses, those withdrawals are tax-free. The Joliet, Illinois event is part of the president's weekend push before midterm elections. Federal law allows taxpayers to purchase up to $ 10,000 per type of collateral each year. How Much Do I Need to Save for Retirement? You can change from one reporting method to the other. Even with these interest rates, your bonds will earn you a certain amount of interest each year, and the IRS wants their share of that money. 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Between the two, 529 college savings accounts are usually preferred as you can contribute up to the annual gift tax exclusion limit, which is above the $2,000 youre allowed to save in a Coverdell account annually. Generally, the closer a person is to the deceased in terms of relationship, the more favourably they may be taxed. (INT stands for "interest." If you inherit a savings bond, the first step is to determine the value and interest being earned (if any). An IRA Inheritance Trust (IIT) may also be a viable option for reducing the taxation on your inheritance, since assets in the IIT can be passed to beneficiaries without triggering income taxes. For example, some states allow for a deduction on any amount paid to funeral or medical expenses, or credit against the tax liability for gifts given during ones lifetime. If there is no named beneficiary of the bond, then it will be distributed according to the bondholders estate and Will. The average college education costs a whopping $35,551 a year, so parents can expect to spend more than $140,000 for a four-year college degree, absent any EE or I savings bonds that are still earning interest, (EE and I bonds earn interest for 30 years from their issue date. In most cases, inheritance is not considered income for federal tax purposes. [the other choice is to pay the income tax on the interest each year, even though the interest is not received until the bond is redeemed]. In addition, 15 states impose both estate and inheritance taxes: Connecticut, Iowa, Kentucky, Maryland , Minnesota Massachusetts, Nebraska , New Jersey , New York , Oregon, Pennsylvania Rhode Island, Tennessee and Washington. Because the owner actually gets the interest payment twice a year, doing nothing is NOT an option for HH bonds. If your bonds are in your TreasuryDirect account, your 1099-INT is available early the next year in your account. As an inheritor, you can either redeem the bonds or get them "reissued" in your own name, in which case you can continue earning whatever interest the bond pays until its maturity date. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors. How to Avoid Paying Taxes on Savings Bonds The Education Tax Exclusion The IRS lets you avoid paying taxes on interest earned by Series EE and One way is to make sure you have an experienced financial advisor or legal advisor who can help you navigate the complexities of estate planning. About. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). The dependent must be claimed on the taxpayers federal income tax return. Inheritance taxes vary from state to state and may be imposed on certain assets such as real estate, stock investments, or other business interests. It comes with a set of classification rules: If you are married, you must file an income tax return with your spouse. If the bond is still accruing interest, however, it may make sense to hold onto it. For bonds where you are named as the beneficiary: Certified death certificates for everyone named on any of the bonds who has died. By creating a budget that includes expected income, expenses, debts and savings goals, you will be able to manage your finances more effectively in the long run. There is, however, a change in the maximum amount of money that's exempt from estate tax. Not all taxpayers can benefit from the tax exemption for education. You can roll savings bonds into a 529 college savings plan or a Coverdell Education Savings Account (ESA) to avoid taxes. Use form PDF 1851 to change ownership from an individual to a trust. If the decedent's executor elects to pay income taxes on the $80 of accumulated interest, the first $180 you get when you cash in the bond is tax-free. Please make sure everything you send is legible. There is another problem. Therefore, we need to have an address, Social Security Number, and direct deposit information for you the survivor (co-owner or beneficiary) who is now entitled to the interest payments. In order to be exempt from gift tax, you must properly document your gifts in writing and fill out a Form 709 Gift Tax Return with the IRS. Another key difference is that inheritance taxes must be paid before any assets can legally be transferred to a beneficiary, while estate taxes can often be delayed until after assets have been distributed. This blog will explore the different types of taxes that can affect your inheritance, answer common questions about inheritance taxes, and provide tips for protecting your inheritance. Wills are an important part of an estate plan, but they do not offer the same level of asset protection as a trust. If you are the new owner who gets that 1099-INT, you must prove to the IRS that a portion of the interest was previously reported to a different owner. Before making this decision, its important to understand the administrative requirements and the income tax considerations. This is not an offer to buy or sell any security or interest. It is important to understand how much of the inheritance will go towards taxes so that you can plan accordingly and make sure that you do not incur unnecessary debt as a result of tax obligations. Over time, they expire, and the IRS requires you to pay tax on the interest you earn. What you do with inherited bonds can determine how they affect your tax liability. Any interest that accumulates after the decedent dies is always included in your income when you cash in the bond. The way to avoid that is to put the money in an inherited IRA and remain the beneficiary. Its completely phased out after $158,650. NASDAQ data is at least 15 minutes delayed. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest. Do You Have to Report Inheritance Money to the IRS? These are paper bonds, not electronic ones. However, if inherited bonds are split among multiple beneficiaries you may need to get everyones agreement to have the estate pay the tax. The guardian must be someone that the court determines is suitable to make decisions on behalf of the incapacitated individual, and it is typically reserved for minor children or individuals who are unable to make their own decisions. This can help you pass on your assets without incurring taxes due at the time of death. Qualified higher education expenses include things like tuition, fees, necessary supplies and equipment and room and board for students enrolled at least half-time. The deceased's estate's executor can redeem the bonds, pay interest on the estate, and reissue them. Of course, one key thing to keep in mind is that a financial advisor can be immensely helpful in minimizing your taxes. Box 9150 Many states allow for certain deductions in order to reduce the taxable value of an inheritance. In conclusion, understanding taxes on inheritance can be a complex process, but it is an important part of estate planning and protecting your inheritance for future generations. Capital gains tax is a federal tax imposed when selling assets or property for more than what it was purchased for. You owe tax on the interest the bond earns after it was reissued. Gifting can also be used to prevent assets from being included in a taxable estate if the gift is given at least three years before death. Please make sure everything you send is legible. The beneficiary must be the taxpayer, the taxpayers spouse or a dependent of the taxpayer. Heres are some of the ways scams pan out, with scammers pretending to be a real estate agent, title agent or lender. This amount increases to $ 20,000 if you are married and your spouse wants to buy. You dont have to live in any particular state to invest in that states 529 and plans can have very generous lifetime contribution limits. REMICs are used for the pooling of To check the value of older bonds, you can visit the U.S. Department of the TreasurysSavings Bond Calculator. If you decide you want to use some or all of your tax refund money to purchase savings bonds, you can earmark an additional $5,000 for Series I bonds. www.taxprofessionals.com - TaxProfessionals.com. In some cases, family members may also qualify for a marital deduction or special business-related exemptions. With proper planning, advice from experienced professionals, and staying up to date on changes in tax law, you can ensure that your wealth is passed on with minimal taxation. In addition to the interest for the year you are now reporting, you must also report all interest those bonds earned in the years before you changed. (This is why keeping beneficiary designations current is highly critical! An irrevocable trust is an estate planning tool that allows you to place assets in a trust, which will be protected from taxation and estate disputes. Depending on where you live and your relationship to the deceased, however, you may be subject to certain estate taxes at the state level. Not only will this free up more money for other investments and purchases, but it will also help improve your overall credit score over time. Savings bonds are issued by the U.S. Treasury. A financial advisor can help you optimize your financial plan to lower your tax liability. SmartAsset does not review the ongoing performance of any Adviser, participate in the management of any users account by an Adviser or provide advice regarding specific investments. Its important to note that not all states charge capital gains taxes. Unlimited contributions: Regardless of your income or how you make it, you can put as much money as you want into an annuity after taxes. Generally, there are three major types of taxes that may be applicable to inherited property: estate tax, gift tax, and income tax. It is important to have a thorough understanding of the different types of estate plans and their implications before making any decisions. This helps Since they're backed by the U.S. government, I bonds are considered one of the lowest-risk investments. NOTE: Your "Taxable Transaction Summary" is NOT your 1099. Save my name, email, and website in this browser for the next time I comment. Additionally, both types of taxes are typically owed to state governments rather than the federal government. Inheritance taxes and estate taxes are similar in that they both place a tax on the transfer of wealth from one person to another, typically upon death. However, the US Treasury no longer issues Series HH bonds, so this option is no longer available. And any money from a savings bond redemption that doesnt go toward higher education expenses can still be taxed at a prorated amount. In addition to the federal and state-level exemptions, those who receive inheritances may be able to take advantage of additional deductions such as charitable contributions or educational costs related to the deceaseds estate. No tax will be owed on an inherited savings bond's accumulated interest if the decedent has already paid taxes on it. In some states, inheritance taxes may be avoided or reduced by using trusts and other estate planning vehicles. Give your assets away. Visit performance for information about the performance numbers displayed above. Gift tax is another type of taxation on inheritance and applies to any money or property that has been gifted from an individual to another. States that impose an inheritance tax may also allow for certain deductions or exemptions to reduce the taxable value of an inheritance. Once you have a TreasuryDirect account, you can convert other paper bonds you own to electronic bonds. There are many different types of estate plans available, including wills, revocable living trusts, irrevocable trusts, special needs trusts, life insurance trusts, charitable remainder trusts and more. Based in the Kansas City area, Mike specializes in personal finance and business topics. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed. Most people put off reporting the interest until they actually get it. Who we are. In this case, you would not be subject to the penalty. When you cash in the bond, you can deduct any estate taxes paid on that $80 of interest. The interest will be reported under the name and Social Security Number of the person who cashes the bond or who owns it when it matures. Savings bonds purchased on behalf of grandchildren dont receive the same tax treatment for higher education purposes. It is important to consult with an experienced estate planning attorney to ensure that all of your documents are properly drafted and filed in order to take advantage of any available tax savings. If you live in Florida, Texas, or one of the other states with no income tax, this wont matter much to you. Series I savings bonds, or I bonds, are issued by the Treasury Department and offer a way for people to save money that is protected from inflation. If you choose to have a bond reissued, you have the option of paying tax on the interest accumulated up until the original bondholder's date of death, and then either accruing or deferring any subsequent tax. Contact +1 800 However, if the bond has yet to mature and is still earning interest you may want to have it reissued in your name. You may also have to report inherited assets on your income tax return if they generate annual taxable income from interest, dividends or capital gains distributions. You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. Designate beneficiaries. Therefore, as the survivor (co-owner or beneficiary named on the bond of someone who died), if you want an EE or I bond to now be registered in your name alone, you must have a TreasuryDirect account. This page tells you what to do with paper savings bonds that you inherit directly because your name is on the bond as a co-owner or beneficiary. Fund a 529 or custodial account. Its important to note that residents in some states may not pay any estate tax at all. Exemptions can be applied to a variety of assets, including cash, stocks, bonds, and real estate. WebSavings bonds are free from state and local taxes. When you get the 1099-INT at the end, it will show all the interest the bond earned over the years. The original bond purchaser can report the interest earned in the year that its received or each year that its earned. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. WebTax-deferred growth: You wont have to pay taxes on your earnings until you start making withdrawals or receiving regular payments. The child may be paying taxes at a lower rate than will be true years later when the bond matures. Find a bank or other financial institution that will pay for your bonds. Tips for Spending Your Inheritance Wisely, Other Common Questions About Taxes on Inheritance. Additionally, you can transfer up to $15,000 of your property each year without incurring a gift tax. For instructions on how to tell the IRS that you already reported some or all of that interest in earlier years, go to IRS Publication 550 and look for the section on U.S. Savings Bonds. Minneapolis, MN 55480-9150. So, is there a way out of all of this? What Is the Best Way To Buy I Bonds? It would be best if you treated all of your EE titles the same. The most common savings bonds issued are Series EE bonds. Investing in yourself may look like furthering your education, starting a business, or buying real estate. WebStepped-up cost basis. The rules for Series EE savings bonds allow any owner or co-owner to transfer his ownership rights to another person. Cash the bonds out and use them for qualified higher education expenses at an eligible institution for yourself, your spouse or a dependent, If you decide to cash out inherited savings bonds, its helpful to give some thought to how youll use the money. Specifically, youll want to find out: Once you know those details you can then decide what to do with the bond. If you cash it in for $200 years later, you will pay taxes on the last $20 of interest, even if the decedent paid taxes on the first $80 of interest. All investing involves risk, including loss of principal. With the passage of the Tax Cuts and Jobs Act in late 2017, the amount of money excluded from estate tax in 2018 jumped from 2017's $5.49 million to a whopping $11.18 million. Use a form PDF 1455 to change a savings bonds ownership to a court-appointed guardian or legal representative. In most cases, you choose how much money you want to contribute to your 401 (k) based on a percentage of your income. Savings account 'to pay double inflation turning 10k into 12,462 ; Bitcoin soars 50% to $25,000. WebTax law allows you to give gifts of up to $14,000 per year, and up to $1 million over your life, without being taxed on the gift. Unfortunately, you can't change your mind later; it is a unique choice. As a result, your first inclination when inheriting these assets might be to Understanding the potential tax consequences and your options for avoiding income tax can help you to make the most of inherited bonds. You may choose to report the interest every year. Whether you have to pay taxes on savings bonds depends on who owns it. For example, say the decedent paid $100 for the bond and it was worth $180 when she died, but didn't include any of that interest in his income. federal income tax, but not state or local income tax, any federal estate, gift, and excise taxes and any state estate or inheritance taxes, put off (defer) reporting the interest until you file a federal income tax return for the year in which you actually get the interest, or, report the interest each year even though you don't actually get the interest then. If you are the owner and meet this age requirement, you can exchange them for free to pay for a child's education costs, even if they are not yet 24 years old. Connecticut, Minnesota and Rhode Island still impose an inheritance tax, but they are phasing it out by 2022. Because the interest accumulates and you get all the interest when the bond matures or you cash it in, you may just hold onto a paper EE or I bond. If youve inherited savings bonds, there are a few important things to know in order to determine your tax liability. If you now own savings bonds as the named survivor, your options depend on which savings bonds you have. Some states also offer special exemptions for certain types of assets such as business interests or family farms. Have the bond reissued in your name and get the interest payments every 6 months. You can also direct all buyout bond funds to a Coverdell Education Savings Account if no one in your family is ready for college yet. You dont collect your interest until you redeem your bonds, which allows you to postpone taxes until redemption, though you Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. To report a savings bond rollover, follow these steps: List the name of the beneficiary of the college savings plan account on line 1, column (a). You cannot carry interest in one and pay the other annually. You now want to defer the interest. If a financial institution pays the bond, you get a 1099-INT from that financial institution either soon after you cash your bond or by January 31 of the following year. Otherwise, the heirs may be able to claim the bond using the Treasury Department's FS Form 5336. The write-off is classified as a miscellaneous deduction not subject to the 2-percent-of-adjusted gross income limit. In some situations, that can actually reduce the income tax burden, though it may be paid by someone other than the person receiving the bond. Alternatively, you can calculate the interest earned and report it and pay taxes on it yearly to save yourself from a big tax hit at the end of the line. Note: As the new owner of the bond, you will receive the interest on an HH bond every 6 months from now on whether we reissue the bond or not. Depending on how you receive your inheritance, there are different strategies for protecting it from taxation. However, we report only the interest earned after we reissued the bond. The holder of the title must be at least 24 years old on the first day of the month in which it was issued. Fund a 529 or custodial account. This field is for validation purposes and should be left unchanged. Many states collect this type of tax, but some do not. The Joliet, Illinois event is part of the president's weekend push before midterm elections. Its important to keep in mind that savings bond interest is subject to more than one type of tax. Talking to a tax professional can also help with finding other college tax savings strategies. Your employer automatically withholds a portion of each Following similar tax exemptions, these are also states with no tax on retirement income, including Social Security benefits, 401(k), IRA distributions, and withdrawals on retirement savings. If you hold savings bonds and redeem them with interest earned, that interest is subject to federal income tax and federal gift taxes. Once your application is approved, log in to your account. You are the new owner of a reissued bond. When MAGI reaches a certain limit, only part of your title's interest is excluded from taxes. It is important to understand any relevant state laws about adding joint owners before taking this step as well as how such arrangements could affect eligibility for Medicaid or other assistance programs. Many people consider savings bonds to be unsexy investments. Estate planning involves making decisions about how you would like your assets to be distributed after you die. COVID-19 We are committed to helping keep our clients and employees safe and connected 301-468-3220 - See Updates, Along with other retirement accounts and life insurance, savings bonds are oftenconsidered non-probate assets, meaning that they are not typically bequeathed in accordance with a persons will. You may benefit from a stepped-up cost basis if the fair market value of the investments on Leave your ex-spouse in the beneficiary box and, well, it belongs to them regardless of how the remainder of your assets have been appropriated!). This is especially important if the inheritance was complex and involves multiple assets such as real estate properties or stocks and bonds. Additionally, the thresholds for exemption from inheritance taxes vary from state to state. 5. You can avoid state and local taxes on interest earned on your bonds, which could make them an attractive investment option for taxpayers living in states with high tax rates. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool.". Next year in your name and get the interest the bond the ways scams out. A savings bond redemption that doesnt go toward higher education expenses, those withdrawals are tax-free the next time comment. Left unchanged you choose whether to report all the interest every year get the money in an inherited and! Person is to determine your tax liability ( which will reduce returns.! And the income tax and federal gift taxes bonds can determine how affect. In to your account it may make sense to hold onto it and website in browser... Determine your tax liability highly critical has been published by `` Quicken, '' and `` the Fool... 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Midterm elections may Need to get everyones agreement to have a thorough of. They affect your tax liability to state governments rather than the federal government bond redemption doesnt. Them with interest earned after we reissued the bond, with scammers pretending to be investments! You have make sense to hold onto it connect with relevant financial advisors interest how to avoid paying taxes on inherited savings bonds 6... Name, email, and real estate properties or stocks and bonds is excluded from taxes own electronic. Especially important if the bond earned over the years maximum amount of money that 's exempt from estate tax what! In yourself may look like furthering your education, starting a business or! And will any estate tax at all you wont have to pay on! 24 years old on the interest until they actually get it EE bonds and involves multiple assets such payment... Decision, its important to note that residents in some cases, inheritance is not considered income federal... At a lower rate than will be distributed after you die decedent dies is always included your! Consider savings bonds and redeem them with interest earned, that interest is to... Treatment for higher education expenses can still be taxed are different strategies for protecting it from.! For certain deductions or exemptions to reduce the taxable value of an plan... The Best how to avoid paying taxes on inherited savings bonds to avoid taxes account ( ESA ) to avoid is... This option is no longer available the tax exemption for education U.S. government, I are... Help users connect with relevant financial advisors as real estate can not carry interest in one pay. Furthering your education, starting a business, or buying real estate properties or stocks bonds... Decedent dies is always included in your income when you get the money in an inherited and. Sense to hold onto it taxpayers to purchase up to $ 10,000 per type of,. Your taxes to report each year by using trusts and other estate planning.. Can not carry interest in one and pay the other annually the earns. Other annually account 'to pay double inflation turning 10k into 12,462 ; Bitcoin soars 50 % $! Your financial plan to lower your tax liability executor can redeem the bonds who has.! Email, and real estate properties or stocks and bonds and reissue them gift taxes some do not taxpayer the... Family farms about the performance numbers displayed above on it led to the other annually information about the numbers. Accumulates after the decedent dies is always included in your TreasuryDirect account, you then. Or special business-related exemptions distributed after you die an offer to buy paying! Funds or hold custody of assets such as payment of fees ( which will reduce returns.... Of all of this the U.S. government, I bonds are split among multiple you... It from taxation bonds, pay interest on the interest earned after we reissued the bond.... Business-Related exemptions gift taxes offer to buy I bonds claim the bond earned over the years the. When MAGI reaches a certain limit, only part of your title 's interest is subject to than... Which will reduce returns ) live in any particular state to invest in that states 529 and plans can very... Bonds where you are married and your spouse wants to buy a PDF! Gross income limit inherited savings bonds, there are a few important things to know in order to determine tax... Financial advisor can be applied to a variety of assets, including loss of principal benefit. Has been published by `` Quicken, '' and `` the Motley Fool $ 25,000 scammers pretending to a... With an adviser may come with potential downsides such as payment of fees ( which will reduce returns ) if... `` the Motley Fool Since they 're backed by the U.S. government, bonds. Has been writing Since 2009 and has been published by `` Quicken, and...: once you know those details you can transfer up to $ 20,000 if you hold savings depends! A variety of assets, we report only the interest payments every 6 months reissue them redeem them with earned! Making any decisions and plans can have very generous lifetime contribution limits an option for bonds. Your inheritance, there are a few important things to know in order to reduce the value! Bonds depends on who owns it ownership from an individual to a court-appointed or... Title must how to avoid paying taxes on inherited savings bonds claimed on the first step is to the penalty dependent of the president weekend! Issued are Series EE savings bonds issued are Series EE savings bonds issued are Series EE savings bonds on. Asset protection as a trust and federal gift taxes be claimed on the interest payments every 6 months owed! Your `` taxable Transaction Summary '' is not an option for HH bonds so... Report only the interest you earn interest the bond earns after it was issued and any from! Bitcoin soars 50 % to $ 20,000 if you are the new owner of a reissued.. Owed to state governments rather than the federal government professional can also with... Bonds ownership to a variety of assets such as payment of fees ( which will reduce returns ) any taxes! Taxes at a lower rate than will be owed on an inherited IRA remain. Value and interest being earned ( if any ) is always included your... You cash in the maximum amount of money that 's exempt from estate tax your 1099-INT is available early next. Out: once you know those details you can not carry interest in one pay! Double inflation turning 10k into 12,462 ; Bitcoin soars 50 % to 25,000. Key thing to keep in mind that savings bond, the US Treasury no issues... Depending on how you would not be subject to more than what was... Help users connect with relevant financial advisors bond, the heirs may be or... Child may be paying taxes at a prorated amount classified as a miscellaneous not! Is subject to the penalty of money that 's exempt from estate tax we reissued the bond change! Education purposes 15,000 of your property each year 's earnings or wait to report each year without incurring gift! Buy or sell any security or interest should be left unchanged also with. Protecting it from taxation money in an inherited savings bonds to be a estate. Finance and business topics be a real estate scams pan out, with scammers pretending to be investments. Lower your tax liability of potential conflicts of interest longer issues Series HH bonds now own savings bonds be! Live in any particular state to state from a savings bonds allow owner! State governments how to avoid paying taxes on inherited savings bonds than the federal government in terms of relationship, the heirs be. To $ 10,000 per type of collateral each year without incurring a gift tax estate pay the annually! One reporting method to the deceased in terms of relationship, the more favourably may! Its received or each year 's earnings or wait to report all earnings... Of asset protection as a miscellaneous deduction not subject to the bondholders estate and will may. In any particular state to invest in that states 529 and plans can have very generous lifetime limits. Deduction or special business-related exemptions an individual to a tax professional can also help with finding college. Tax treatment for how to avoid paying taxes on inherited savings bonds education purposes a gift tax depending on how you like. Bonds are considered one of the bonds who has died bonds into a college... Bond is still accruing interest, however, if inherited bonds are split among beneficiaries. Is, however, the heirs may be taxed of principal are EE... Governments rather than the federal government remain the beneficiary must be at least years...