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Inheriting government savings bonds may feel like receiving a thoughtful gift from the past. But before cashing them in, there is a key detail that many beneficiaries overlook, and that is taxes.

Inherited savings bonds usually come with a tax bill. The amount and timing depend on how the original owner handled taxes during their lifetime and what you choose to do with the bonds now.

Here’s How Savings Bonds Are Taxed

Savings bonds accumulate interest over time, and that interest is subject to federal income tax. The interest is not taxed at the state or local level, which provides a small but valuable break. In some cases, federal estate or gift taxes may also apply, though only for larger estates.

The original bondholder could have chosen one of two reporting methods: paying tax on the interest annually as it accrued, or deferring all taxes until the bond was redeemed. Most people defer. That means if you inherit a bond, you may be responsible for years’ worth of interest that has not been taxed yet.

What Happens When You Inherit a Bond

If you are named as a co-owner or beneficiary, the bond typically bypasses probate and transfers directly to you. Your next step is to check the bond’s value, interest status and maturity date. Older paper bonds can be valued using the U.S. Treasury’s online calculator, while electronic bonds can be checked through TreasuryDirect.

From there, you generally have two choices.

Cash it out : Pay tax on all the interest earned so far. This is often the choice if the bond has matured and stopped earning.

Reissue it in your name : Let the interest continue to grow and defer taxes until you decide to redeem. This can be helpful if the bond is still earning.

Who Pays the Tax?

In some cases, the deceased person’s estate can report and pay tax on the interest earned during their lifetime. That reduces your tax burden and shifts the liability to the estate. However, if the estate does not make that election, or if the bond passes outside of the estate, you may be responsible for the entire amount of deferred interest.

When multiple beneficiaries inherit bonds, deciding who pays can be tricky. Often, everyone must agree if the estate is covering the tax. In such cases, consulting an estate attorney or tax professional may be a good idea.

Using Bonds for Education

There is one notable exception. If you inherit Series EE or Series I bonds issued after 1989, you may be able to cash them in tax-free if the proceeds are used for qualified higher education expenses. This includes tuition, fees, and in some cases, room and board at eligible institutions.

Keeping Records Matters

Because tax liability on inherited bonds can shift between the original owner, the estate and you as the beneficiary, keeping clear records is essential. If any tax has already been paid on interest, hold on to that documentation so you do not end up paying twice.

Bottom Line

Inheriting savings bonds is not just about deciding when to cash them in; it is also about planning for taxes. You may be able to reduce or even avoid the tax hit by working with the estate, using the education exclusion, or rolling funds into a tax-advantaged account.