If an accountholder for an interest bearing account is deceased, and the account has a POD designation, does the interest become reportable to the POD?

An inheritance is not subject to income tax. The interest should be reported under the decedent's SSN. The decendent's estate would have recourse against the beneficiary to the extent it needs to recover some part of the account funds to pay any estate tax.

Ray,

Shouldn't there be two 1099-INTs filed? One for interest earned by the decedent, under his/her SSN, through the date of death; the other for interest earned after that date by the POD beneficiary(ies)?

Frankly, I have pored over the IRS's site looking for this information and have found it singularly unhelpful.

Most accountants would prefer to have the two or more 1099's produced if the account is going to remain open (which would be unusual). Interest earned on the deceased's account can be reported under his or her TIN for the tax year of death, unless the estate is distributed in that tax year, but not thereafter. If the estate is distributed during the tax year of death, then the interest must be broken out if the account is going to continue to earn interest. That is, up to the date of death, the interest is reported under the deceased and thereafter, any additional interest is reported under the TIN of the receiver(s).

Chances are the bank is going to be closing the account in order to disburse it to the beneficiary in any case. If that occurs, then all of the interest is reported under the deceased's TIN because no change in ownership occured. If the account is going to change over to an Estate account, then the interest will be reported under the decedent's TIN until the date of death and the estate's TIN thereafter.

The following is from IRS Publication 559:

"Interest and Dividend Income (Forms 1099)
A Form 1099 should be received for the decedent reporting interest and dividends earned before death and included on the decedent's final return. A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts.

For example, a Form 1099-INT reporting interest payable to the decedent may include income that should be reported on the final income tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (discussed later). For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next under How to report.

See U.S. savings bonds acquired from decedent under Income in Respect of the Decedent, later, for information on savings bond interest that may have to be reported on the final return.

How to report. If you are preparing the decedent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to another recipient (the decedent's estate or another beneficiary), report the total interest shown on Form 1099-INT on Schedule 1 (Form 1040A) or on Schedule B (Form 1040). Next, enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. Then, show any interest (including any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation.

Report dividend income for which you received a Form 1099-DIV, Dividends and Distributions, on the appropriate schedule using the same procedure."

Thank you. That's what I was looking for. Of course, what those instructions don't address is how to handle the case in which a customer dies, leaving a POD-designated account. If the account isn't claimed by the beneficiary until the following tax year, and the bank doesn't have information needed to file a 1099-INT on the beneficiary's interest, how does the bank handle things?

If the bank doesn't take any action, all the interest pre- and post-mortem will be reported under the decedent's SSN. I'm guessing that's what often happens. In fact, it may be that bank records aren't updated until a year or more later. Not correct, but probably what happens.

John,

Doesn't the interest that is generated from the decedent's funds still count as part of the decedent's estate? I don't understand why the beneficiary would pay any income tax on an inheritance, including the interest earned.

Confused

Let me clarify my earlier response since I quickly read the post as dealing with the interest earned up to the owner's date of death. A POD account will be governed by the applicable state's version of the Uniform Muliple Party Accounts Law ("MPAL"). The MPAL provides that during the lifetime of a customer owning a POD account, the funds belong to the customer and the beneficiary has no claim to the funds. The MPAL also provides that upon the POD account owner's death, the funds belong to the POD beneficiary.

The interest earned on the account up through and including the date of death belongs to the account owner and should be reported under his/her SSN. The POD beneficiary will inherit the date of death balance (including accrued interest from January 1 to the date of death) and this balance is not considered income to the beneficiary (since it is an inheritance). Starting the day after the account owner's death, the account belongs to the POD beneficiary. Therefore, any interest earned on the account after the owner's death should be reported under the beneficiary's SSN as it is his/her income (not an inheritance). As a practical matter noted by John, if the beneficiary waits to claim the account after the first of the next year, the bank will report all interest earned during the year the owner died under the owner's SSN.

Thanks, Ray. I think we're all singing the same tune now (I'm a little off key, of course).

Thank you both,