7689 / How is the owner of Series H or HH bonds taxed?
Series H and HH bonds are interest-paying United States savings bonds. Interest is paid by check semiannually, and the amounts paid in a year are included in gross income.2 The bonds are nontransferable. Interest received on H/HH bonds is subject to all federal taxes, and the bonds are subject to federal and state estate, gift, inheritance, or other excise taxes but not to state or local taxes on principal or interest.3
If H or HH bonds were received in exchange for E or EE bonds on which reporting of interest was deferred, the owner may continue to defer reporting the interest accrued on the E or EE bonds exchanged until the year in which the H or HH bonds received in the exchange reach final maturity, are redeemed, or are otherwise disposed of. At that time, the amount of unreported interest on the E or EE bonds that was not recognized at the time of the exchange must be reported as interest.4 HH bonds bear a legend showing how much of the issue price represents interest on the securities exchanged. The owner of Series H or HH bonds received in exchange for E or EE bonds on which reporting was deferred may elect to report the past increases in redemption value of the E or EE bonds. The election would also apply to any other E or EE bonds or H or HH bonds owned or thereafter acquired, unless the Service permits a change in the owner’s method of reporting.5
The Service privately ruled that: (1) the distribution of Series E and Series HH savings bonds from a decedent’s estate to several tax-exempt organizations did not result in the recognition of income by the estate; (2) the accrued interest attributable to the bonds would be includable in the gross income of the exempt organizations in the year in which the bonds were disposed of, redeemed, or reached maturity; and (3) assuming that the organizations continued their exempt status, the accrued interest would be exempt when recognized by the organizations.6