In May 1995 my grandfather purchased $11k in EE savings bonds. He died on July 20, 2008. My father transferred the bonds to himself and then from him to me in February 2015 (well, the papers were signed in Feb 2015; the actual transfer took place in May 2015).

My father just got a letter from the IRS today saying that he owed income tax on these bonds - on about $11k of income - back in 2015. He has about $100 in interest charges now as well.

My question is two fold.

  1. The bonds were never cashed so why is income tax being paid on them? And if income tax were to be paid it seems like I'm the one who should be paying it - not him?

  2. It seems like the interest earned on these ought to be counted as capital gains? With capital gains, as I understand it, the value of the assets gets reset to the current value at the time of death of the original owner. idk how much the bonds were worth in 2008 but the $11k of income the IRS is saying he received in 2015 is pretty much double the value of the bonds. That makes since since the bonds were transferred to me about twenty years after their issuance but what about the value they accumulated from 1995-2008? Shouldn't that be deducted from the $11k of income that they're being reported as having generated?

1 Answer 1


A paper EE series US Savings Bond is what is called a zero-coupon bond: you buy it at a discount from the face value (50% discount for US Savings Bonds), and it earns interest though you don't get the interest as cash (that you could invest elsewhere). Instead, the interest earned increases the redemption value of the bond -- the money that you will receive if you take the bond to your bank to cash it in before the maturity date. When the bond finally matures, its redemption value has increased to the full face value. The maturity date for paper EE series US Savings Bonds issued in May 1995 is 17 years.

Now, with zero-coupon bonds in general, the IRS requires that the interest earned each year be reported as interest income even though you did not receive any cash income, and tax is due on the interest (unless it is a tax-free municipal bond or the bond is held in a tax-deferred investment such as an IRA or 401(k) plan). However, there is a special exemption for EE Series US Savings Bonds in that the owner has the option of not declaring the interest each year but instead reporting all the accumulated interest as interest income in the year of redemption. (Most people choose this option). It is not capital gains as you would like to be.

So, if your grandfather paid $11K$ for EE series US Savings Bonds in May 1995, the face value of the bonds he received was $22K, and, assuming that your grandfather followed typical practice, the bonds were worth $22K in May 2012, and $11K interest income needed to be declared that year. This matches up pretty well with the amount the IRS told him was interest income on which he had to pay income tax (though the year is off by 3). Now, your grandfather died in 2008, and what happened to the bonds depends on in whose name(s) the bonds were registered (e.g. was your father named as the survivor on the bond), or, if your grandfather was the sole owner, how your grandfather's estate was handled (the interest accrued till your grandfather died belonged to the estate). Note also that EE series bonds continue to earn interest in years 18 through 30 after they mature, but at maturity, the interest rate is reset by the Treasury, usually to the long-term interest rate which has been very small over the past many years. So, the interest earned in 2012-2015 when your father effectively redeemed the bond is small enough that the "approximately $11K" could be construed as covering $11.3K consisting of $11K of interest before maturity and $300 interest (at about 1% per annum) over the three-year post maturity period. The $100 interest earned by you for the current year sounds about right too.

All in all, it might be the case that your grandfather bought the bonds in his name, your father's name, and your name (were you very young in 1995?), your father and you inherited the bonds in 2008, and then your father removed your grandfather's name from the bonds in 2015, thus transferring the bonds to his name and yours in 2015, and soon thereafter removed his name, transferring the bonds into your name alone. As to why 2015 and not 2008 when your grandfather passed away, did you turn 21 in 2015 (twenty years after the bonds were bought)?

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