Redeemed HH/H Bonds after final returns filed everything closed - 1099 - how to claim?

[taxbrewster]

Business clients of mine and now coming to me to handle personal returns. Other accountant left town.

Father dies in 2017, not many assets, 3 sons - filed final return, every thing disbursed no estate return filed. 

Later find out there are Series HH/H bonds, Son #1 finally get them released and redeemed as the fathers personal rep.

Received 1099 this year in father's SS#. for 85K of accrued interest - they just want to split between the 3 of them.

Wondering how to report on the Sch B and if this is possible or do we / can we need to reopen years? Or can Son #1 nominee the interest to son #2 and son #3.

Not sure we even have access to old returns, sons just want to split the interest 3 ways - pay the tax - call it a day

I have researched the threads in this forum as well as others but don't have a clear answer. Any one dealt with this before? Thank you in advance.

 

[SaraEA]

Series HH bonds pay interest semiannually, and it is reported on the tax return every year.  There is no accrual.  When they are redeemed (unlike EE bonds), it is just a return of principal.  The only interest that should be taxable is that paid in 2017 (should have been on the father's return) and any paid in 2018.  Is there a 1099B? 

[bbstacker]

HH bonds could only be purchased by exchanging E or EE bonds.  One of the features was to defer the accrued interest on the E or EE bonds and pay the tax due when the HH bonds matured.  When a decedent owns savings bonds at death the accrued interest can be either reported on the decedent's final return or the beneficiary of the bonds pays the interest.  Please see treasurydirect.gov website for additional information.

[taxbrewster]

Thanks for the site. Helpful info.

[mwrightea]

If the father died in 2017, and bonds cashed out in 2018,  I believe there is an estate tax return due.  

[Gail in Virginia]

If father died in 2017, I believe you can either elect to report the interest on his final personal return or file a fiduciary return and report the interest there.  If the income is all distributed from the estate account, the beneficiaries would get K1s for the part of the interest distributed to them and pay the tax on their share.  You can elect the fiscal year for the fiduciary return with the filing of the first return.  So if dad died in, say June 2017 you could elect a fiscal year ending May 31.  If there was no income for the fiscal ending 5/31/18, no return would have been due.  If the bonds paid interest sometime in late 2018, they could be reported on the fiscal year ended 5/31/2019, and would go on the beneficiaries return for 2019.  Just as an example, and I think it would work this way.  Hard to say without actually know all the facts and circumstances.  And someone may know more about this and why this won't work. 

[mwrightea]

1 hour ago, Gail in Virginia said:

If father died in 2017, I believe you can either elect to report the interest on his final personal return or file a fiduciary return and report the interest there.  If the income is all distributed from the estate account, the beneficiaries would get K1s for the part of the interest distributed to them and pay the tax on their share.  You can elect the fiscal year for the fiduciary return with the filing of the first return.  So if dad died in, say June 2017 you could elect a fiscal year ending May 31.  If there was no income for the fiscal ending 5/31/18, no return would have been due.  If the bonds paid interest sometime in late 2018, they could be reported on the fiscal year ended 5/31/2019, and would go on the beneficiaries return for 2019.  Just as an example, and I think it would work this way.  Hard to say without actually know all the facts and circumstances.  And someone may know more about this and why this won't work. 

I agree with everything Gail said.  She was much better at explaining than my post.   I might file a 0 fiscal year return for year one.   

[SaraEA]

This may clear up the above confusion.  From the treasury direct site:

" Unlike EE bonds, HH bonds are current-income securities. You paid face value and receive interest payments by direct deposit to your checking or savings account every six months until maturity or redemption. ...  

Do I have to pay taxes on my interest earnings?

Yes, you must report your interest payments on HH bonds as interest income on your federal income tax return each year. This interest isn't subject to state or local income taxes. The U.S. Treasury issues an interest income statement (1099-INT) by January 31 of each year showing the interest you earned the previous year."

However, if you purchased the HH bonds with matured E or EE bonds and deferred the interest on those, that interest is reported in the year of redemption:

Is there any tax liability when I cash HH bonds?

If you (or the original bond owner) deferred paying federal income tax on interest earned on EE or E bonds you exchanged for the HH bonds you're redeeming, you will need to report this deferred interest for the year in which the bonds reach final maturity or are redeemed, whichever occurs first. You will receive an IRS Form 1099-INT showing the deferred interest, which is reported to the IRS.

That appears to be the case with your client, since the 1099 showed deferred interest.  The cleanest way to do this is to file an estate return and pass it through to the beneficiaries.  At least you can deduct the cost of the tax prep (which is allowed, even if not paid in the fiscal year), which may save the Bs some taxes on the interest.  There may be some other expenses too, like probate or attorney fees.

[taxbrewster]

Yep, that is the way I am going. Thank you for the assistance.