Do I need to calculate step-up in basis on inherited ibonds to reduce tax liability after death?

The good news is that I-bonds don't actually work like stocks or real estate when it comes to capital gains and step-up in basis. The interest earned on I-bonds is subject to federal income tax, not capital gains tax. When someone inherits I-bonds, they have a few options for handling the tax. You can either pay the federal income tax on all the interest that accrued during the original owner's lifetime when you cash them in, or the executor can choose to include all interest earned up to the date of death on the decedent's final income tax return. If you choose the second option, then when you eventually cash the bonds, you'll only pay tax on the interest that accrued after the date of death. This is probably what you're thinking of when you mention "step-up in basis," though it works a bit differently with bonds than with other assets. As for tracking the interest, TreasuryDirect should have the information about the total accrued interest, but they might not break it down month by month. You may need to contact them directly to get the specific value as of the date of death.

I dealt with almost this exact situation last year and found a solution that really helped. I used taxr.ai (https://taxr.ai) to sort through all the bond documentation and calculate the exact interest that had accrued up to my father's date of death. It saved me tons of time trying to piece together all those numbers myself. Their system let me upload the TreasuryDirect statements and my dad's death certificate, and it calculated exactly what portion was taxable to the estate vs what would be taxable to me as the beneficiary. It even generated documentation I could use for both tax returns. Way easier than the hours I spent on hold with Treasury trying to get this info!

Just wanted to follow up about taxr.ai - I tried it after seeing your comment and it was exactly what I needed! I uploaded the statements for all 20 of my aunt's bonds and it broke everything down perfectly, showing which interest was already taxed on her final return and which would be taxable to me when I eventually cash them. It even flagged a couple of the older bonds that were about to stop earning interest, which I didn't realize. Saved me from leaving money on the table! Definitely worth it for anyone dealing with inherited bonds.

If you're still having trouble reaching someone at TreasuryDirect to get the information you need, you might want to try Claimyr (https://claimyr.com). I spent WEEKS trying to get through to TreasuryDirect about my mom's bonds after she passed, but their customer service is just overwhelmed. Claimyr got me connected to an actual human at TreasuryDirect in about 20 minutes instead of waiting on hold for hours or getting disconnected. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The TreasuryDirect rep was able to pull up the exact value of each bond as of my mom's date of death, which was exactly what I needed for calculating the tax liability. Dealing with inherited bonds is complicated enough without also having to fight just to get basic information!

I have to apologize and follow up on my skeptical comment. After getting nowhere with TreasuryDirect for two weeks (literally disconnected 7 times after waiting on hold), I broke down and tried Claimyr. Honestly, it worked exactly as advertised. I got a call back in about 25 minutes with an actual TreasuryDirect representative on the line. They were able to provide the exact values of my father's bonds as of his date of death. The rep even emailed me the documentation I needed for tax purposes on the spot. Sometimes it's worth admitting when you're wrong - this service saved me hours of frustration and I was able to get everything settled with the inherited bonds in one call.

One thing to keep in mind that nobody's mentioned yet - if your mother held these ibonds for education purposes, there might be additional considerations. Some people use ibonds for education expenses because of potential tax exclusions. If that was her intent, you might want to check if any of those educational tax benefits can still apply after inheritance. Might be worth asking a tax professional about this specific scenario since the education exclusion has specific requirements.

Has anyone else found that inherited savings bonds are a complete nightmare to deal with? I inherited some from my grandpa and the amount of paperwork and confusing tax implications is ridiculous. The government really doesn't make this easy!

I went through this exact situation with my dad's I-bonds about 8 months ago. The key thing that helped me was getting organized early - create a spreadsheet tracking each bond's serial number, purchase date, face value, and current value. One tip that saved me time: when you call TreasuryDirect, have your mom's Social Security number, the bond serial numbers, and her death certificate handy before you even dial. They'll need all of this info to give you the date-of-death values. Also, don't feel pressured to make the tax election decision immediately. You have until the due date of her final tax return (including extensions) to decide whether to report the accrued interest on her final return or handle it when you eventually cash the bonds. I ended up consulting with a tax professional because the numbers were significant enough to make a real difference in our overall tax situation. The whole process is definitely more complicated than it should be, but once you get the documentation sorted out, the actual tax calculations are pretty straightforward.