Treasury Direct wrote:An HH/H Bond's face value may include deferred (postponed) interest from an earlier bond. If it is carrying deferred interest, you will receive that interest as part of the bond's face value when you redeem that bond.
So the HH Bond could have interest payable at redemption. Interest is income.
Is it taxable?
Federal income tax: Yes
State and local income tax: No
You must report HH Bond interest on your federal income tax return for the year in which we paid the interest.
HH/H Bonds were offered in exchange for EE/E Bonds and some other older savings bond series. Interest on the EE/E and other bonds exchanged may have been deferred through the life of the HH/H Bond.
Your sister should have received a 1099-INT from whomever cashed the bonds and the portion attributable to interest would be listed in box 3.
To estimate the tax I would need to know the amount in box 3, also I don't know what your sister's filing status is for 2012. Is she being claimed as a dependent on your parents return?