With the most recent announcement of low savings bond interest rates — zero percent for the fixed portion of Series I bonds — you may have little incentive to buy these investments. Add an electronic-only purchase requirement and the potential end to the election to purchase bonds with your tax refund, and you might never own savings bonds unless you inherit them.

If you do inherit, what’s the income tax consequence? The answer depends on whether or not the original owner of the bond was reporting the interest income each year.

If the bond owner was reporting the interest, you’ll report the amount of interest earned after the date of death on your return. Current-year interest prior to that date is reported on the owner’s return.

If the bond owner was not reporting the interest each year, you have a choice. One option is to include the interest through the date of death on the bond owner’s return. Then you’re only responsible for the interest earned going forward. This can be a smart move if the bond owner is in a lower tax bracket than you are.

Alternatively, you can report all interest earned since the bond issuance on your own tax return. Generally, you’ll report the income — and pay the resulting tax — in the year you sell or convert the bonds. Under certain circumstances, you may also be able to take a deduction for part of the federal estate tax paid.

Do you have questions about inherited savings bonds? Give us a call. We’re here to help with the answers.