Do You Pay Taxes on a Payable on Death Savings Bond?
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When a loved one names you as the beneficiary of their savings bond, the bond is designated as Payable on Death (POD), and it skips probate and goes directly to you. But the real question on mind is: who pays the tax on the interest?
Savings bond interest is taxable, but exactly how much you will owe depends on whether the original owner handled the taxes during their lifetime or deferred them.
How Savings Bonds & Taxes Work
Savings bonds, most commonly Series EE or I bonds, earn interest for up to 30 years. That interest is not subject to state or local income tax, but it is taxable at the federal level. While reporting the interest, owners can either declare it each year as it accrues or they can defer taxes until the bond is cashed in or reaches maturity.
Most people choose deferral. That means by the time you inherit the bond, all of the accumulated interest is still untaxed, and someone needs to pay it, either the estate or you as the new owner.
What Happens After the Owner’s Death
If you inherit a POD bond, ownership passes to you immediately, but you do not owe taxes at that exact moment. The estate’s executor can choose to include all the interest earned up to the date of death on the decedent’s final income tax return. If they do this, the beneficiary (you) is only responsible for the interest earned after that point. If the estate does not make this election, you become accountable for the full amount of interest from the bond’s issue date until redemption.
What Are The Ways to Reduce Taxes?
One of the best-known strategies is education exclusion. If you use the proceeds from redeeming Series EE or I bonds to pay for qualified higher education expenses like tuition, fees, or certain supplies, you may be able to exclude the interest from federal income tax.
Another option is rolling the redeemed bond funds into a 529 college savings plan. These plans allow tax-free withdrawals for qualified education expenses, and they can also be reassigned to another family member if one child does not use the funds.
There are limits, though. The education exclusion only applies if the bond owner was at least 24 years old when it was issued, the bonds were issued after 1989, and your income falls below IRS thresholds. For 2025, the tax break begins to phase out for joint filers with modified adjusted gross income above $149,250, and it disappears completely above $179,250. For single filers, the range is $99,500 to $114,500.
Inheriting vs. Owning Outright
It is worth noting that the tax rules hinge on ownership. If you buy a bond for yourself, you are responsible for all the taxes on the interest. If you are added as a co-owner and share the cost of purchase, you will split the tax bill proportionally. In community property states, spouses share the tax equally.
But for inherited POD bonds, the main question is whether the estate elects to pay the tax on interest accrued before death. If not, you inherit both the bond and the tax bill.
Bottom Line
Savings bonds may not offer the highest returns compared with stocks or mutual funds, but they remain a safe, long-term investment. When you inherit them through a POD designation, the transfer process is straightforward. The tax side, however, requires attention.
Understanding the rules up front can help you avoid surprise tax bills and make the most of the legacy left behind.