Michaelmars

[jasdlm]

Would you please clarify for me the position you posted on another thread regarding a 'step up' in basis for accrued savings bond interest at the death of the original holder? I want to make certain that I did not err in a return I prepared earlier this year.

Facts: Client inherited HH bonds, the prinicipal of which was mostly deferred E bond interest from 20 years ago. Gov't issued a 1099 INT for the deferred interest. I matched the deferred interest to the 'rollover' amounts from the face of the original bonds and came up with the exact number 1099'd. I reported all the interest on the clients 1040 (she cashed the bonds). Did I somehow miss a possible tax savings for my client, or did I misunderstand your other post.

Thanks so much for taking time to respond.

[michaelmars]

what we do is show the accrued interest due as part of the 706 valuation [separate line item] and thus the cost basis is increased on in the hands of hte beneficiary. i know this is done for muni's, cd's and t-bills. but hh and e's have some funky interest accrual rules and my estate guy is out today and tomorrow.

[jasdlm]

Thanks for your response. If you have any additional ideas later, please let me know.

[RitaB]

Would you please clarify for me the position you posted on another thread regarding a 'step up' in basis for accrued savings bond interest at the death of the original holder? I want to make certain that I did not err in a return I prepared earlier this year.

Facts: Client inherited HH bonds, the prinicipal of which was mostly deferred E bond interest from 20 years ago. Gov't issued a 1099 INT for the deferred interest. I matched the deferred interest to the 'rollover' amounts from the face of the original bonds and came up with the exact number 1099'd. I reported all the interest on the clients 1040 (she cashed the bonds). Did I somehow miss a possible tax savings for my client, or did I misunderstand your other post.

Thanks so much for taking time to respond.

I did a little reading to see if I could have handled my situation better, and found that Form 706 (or an extension request) must be filed within 9 months of DOD. So this option really was not available for me. The Dad died in 2004, and I first met the son when he contacted me for help in March of 2007. I don't know if this is any help to you or not, but it made me feel better.

[RitaB]

I did a little reading to see if I could have handled my situation better, and found that Form 706 (or an extension request) must be filed within 9 months of DOD. So this option really was not available for me. The Dad died in 2004, and I first met the son when he contacted me for help in March of 2007. I don't know if this is any help to you or not, but it made me feel better.

I did a little more reading, and I believe this "step up" is only going to take place if the estate actually pays tax on the accrued interest. I could be wrong, I often am, but I will definitely check into this some more in a few weeks:

http://www.ucrgift.org/giftlaw/glawpro_sub...SS=11&SS2=3

Excerpt:

Example 4.11.3A

David Decedent owned a U.S. Series EE savings bond at the time of his death. The face value of the bond was $1,000 and the original purchase price was $500. David left the savings bond to his daughter Suzy. As an asset owned at time of death, the $1,000 savings bond is properly includable in David's gross estate for estate tax purposes.

Moreover, Suzy will have $500 of interest income when she redeems the $1,000 savings bond. The $500 of taxable income represents the untaxed interest income that accumulated during David's life. Finally, because this is an IRD asset, there is no step up in basis for Suzy. However, she might receive a partial income tax deduction to offset some of the taxable interest income if David's estate paid estate tax on the value of the savings bonds. See Sec. 691©.

[jasdlm]

Thank you so much, RC! I was starting to feel sick to my stomach that I had cost my client several thousand dollars!

[RitaB]

Thank you so much, RC! I was starting to feel sick to my stomach that I had cost my client several thousand dollars!

I know that sick feeling!

Well, like I said, I may be wrong, but if you go the that site which links you to the tax code, it seems to me that you can't just report the interest on 706 and it be exempt cause your estate was under $2 million, and avoid the tax on some part of the interest on the bonds. That is how I read this, anyway. If I'm mistaken, I hope somebody that knows more than I do will tell us. Nether my hair dresser nor mechanic is speaking to me, I'm so grouchy this time of year! Haha!

BTW, have you seen Form 706? Quite a form. Yikes!

[michaelmars]

However, she might receive a partial income tax deduction to offset some of the taxable interest income if David's estate paid estate tax on the value of the savings bonds. See Sec. 691©.

PERHAPS i shouldn't have used the term step up

[RitaB]

However, she might receive a partial income tax deduction to offset some of the taxable interest income if David's estate paid estate tax on the value of the savings bonds. See Sec. 691©.

PERHAPS i shouldn't have used the term step up

I understood what you meant, Michael. My issue is, if no tax was paid on the savings bonds (because the estate didn't owe any and it wasn't reported on the final return), the recipient of the inherited bonds should not be getting out of paying on the accrued interest. I took your post #12 on the other thread to mean that you would file Form 706 for a decedent whose estate is less than $2 million in order to help survivors (everyone, actually) escape tax on savings bond interest. I don't think that's proper use of the form with income in respect of decedents, like savings bond interest.