Estate Tax on US Saving Bonds

I'm the Administrator, and one of 3 heirs of my late grandmothers estate in NJ. I am not sure how to treat the interest of $70,000 from US Savings Bonds - most of which were over 40 years old - that were in her name and that I cashed for the estate. The entire estate is about $400,000, which I have been told is less than the $675,000 threshold that require a Federal Estate income tax return. Do I need to file a return on the interest from these bonds for the estate - or do I need to file and report the interest on a 'final' tax return for her? She was on social security for the past 22 years and hasn't filed a federal return in all that time. I'd like to file and pay whatever taxes are due before closing the estate and disbursing the funds.

Thank you in advance!

If these were Series E, Series EE, or Series I bonds, then the tax became payable at the time you sold the bonds. Since the Estate sold the bonds, the income from the sale is income to the estate. Even though the estate has no estate tax to pay because of the $675 exclusion, it must file an income tax return on Form 1041, and pay tax on income it earned.

As for your grandmother’s income tax. Only income she earned, and not income earned by the estate, should be included on her final return. If all she had was SS and some interest income, perhaps she did not have enough taxable income to require a return. IRS Publication 17, Your Federal Income Tax has good info on filing the decedent’s last return. You can download Pub 17 for free at [url]http://www.irs.ustreas.gov/forms_pubs/index.html.[/url]