Can I avoid a tax bill when I cash in savings bonds?

Q. My mother recently passed away and I inherited matured savings bonds from her and my grandmother. The face value is approximately $ 50,000 and the total is approximately $ 200,000 with interest. I send them to be cashed. Is there a way to avoid a big tax bill next year when I file my taxes because of the $ 150,000 earned in interest?

– Heir

A. We are sorry to hear of the loss of your mother.

There are a few things to consider regarding the imposition of these obligations.

Interest accrued on the savings bonds will not be taxed when you cash the bonds if they were included in your mother’s taxable income, said Joseph Sarnecki, a certified financial planner at US Financial Services in Fairfield.

For example, he said, maybe your mother paid income taxes accrued interest every year. Otherwise, upon his death, the executor could have included the accrued interest on his last tax return, Sarnecki said.

Say bought a $ 100 savings bond and it had risen to $ 150 when she died. If the executor pays tax on the $ 50 of accrued interest, the first $ 150 you get when you cash the obligation is tax-free, he said.

But if this was not the case, you are unfortunately responsible for Pay taxes on interest when you cash the deposit.

One option you can consider is to sell half of the bonds this year and the rest in January 2022, spreading taxes over two years, he said. If so, you can always consider other tax saving strategies, such as maximizing traditional IRA and 401 (k) account contributions to lower your overall taxable income, he said. .

Keep in mind that you can claim a deduction for the amount of inheritance taxes paid on interest included in the deceased’s estate, but not on their income, Sarnecki said.

“For example, let’s say the deceased paid $ 100 for the bond and it was worth $ 150 when they died, but didn’t include any of that interest in their income. When you cash the obligation, you can deduct any estate tax paid on that $ 50 of interest, ”he said.

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for NJMoneyHelp.com‘s weekly electronic newsletter.