REPORTING INCOME FROM BONDS

                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, March 22, 1993                   TAG: 9303230322
SECTION: MONEY                    PAGE: 6   EDITION: METRO 
SOURCE: 
DATELINE:                                 LENGTH: Medium
REPORTING INCOME FROM BONDS
The Roanoke chapter of the Virginia Society of Certified Public Accountants will answer tax-related questions from our readers in a special feature on the Monday Money Page. Send them in writing to Tax Questions, in care of Mag Poff, Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.
Q: At the time of her death, my sister had U.S. Savings E Bonds in her name or mine (not payable on death). These bonds were purchased in the 1960s.
What part of the interest do I include as income on my federal tax return? Is it all of the interest from date of purchase or interest from the date of death?
A: Holders of Series E Bonds have two options available for reporting the income:

Interest income may be deferred until the bonds are cashed, reach final maturity or are disposed of, which ever occurs first. This is cash basis.

Or interest may be reported annually as it accrues. This is accrual basis.
Most holders use the cash basis.
Any amount of gross income not reported in the returns of a decedent is, when received, includable in the income of the person receiving such amounts by inheritance or survivorship through the decedent.
Thus, assuming your sister had used the cash basis, all of the interest from the date of purchase would be included in the beneficiary's return for the year in which the bonds are cashed or reach final maturity, whichever occurs first.
If your sister's total gross estate was in excess of $600,000 and estate tax was paid, the beneficiary including the interest in gross income may take a corresponding deduction based on the estate tax attributable to the accumulated interest. For individuals, this deduction may be taken only if deductions are itemized on Schedule A. The deduction is not subject to the floor of 2 percent of adjusted gross income on itemized deductions.
However, the interest income may be deferred. Series E Bonds, for up to one year after the month that they reach final maturity (40 years), may be exchanged for Series HH Bonds. This exchange does not trigger the deferred Series E interest.
Series HH Bonds pay interest on a semiannual basis, which is reportable in the year received, but the deferred Series E interest is not reportable until the Series HH Bonds are cashed, reach final maturity (20 years) or otherwise disposed of, whichever comes first.
Answered by James B. Taney of Anderson & Reed.

by Archana Subramaniam by CNB