How EE Bond Redemption Triggers a Tax Bill

When you redeem an EE bond, you owe federal income tax on the interest it earned—not on the original amount you paid. The Treasury does not withhold this tax automatically, so you report it yourself when you file your tax return for the year you cashed the bond.

The taxable amount is the difference between what you received and what you originally invested. If you bought a $50 EE bond for $25 and redeemed it for $52, your taxable interest is $27. You report this on your federal return in the year you redeem it, and you pay tax at your ordinary income tax rate—the same rate as wages or salary.

State and local taxes vary. Some states tax EE bond interest; others do not. Check your state's tax authority website or ask a tax preparer whether your state treats savings bond interest as taxable income.

Key Takeaways

  • You owe federal income tax only on the interest your EE bond earned, not on your original investment, and you report it in the year you redeem the bond.
  • The Treasury does not automatically withhold tax from your redemption, so you must include the interest on your tax return yourself.
  • You pay tax at your ordinary income rate, which depends on your total income for the year and your filing status.
  • Some states tax EE bond interest and some do not, so check your state's rules before you redeem.
  • You can defer reporting interest by choosing to report it annually instead of waiting until redemption, which may lower your tax bill in the year you cash the bond.

The Difference Between Accrued Interest and Redemption Value

EE bonds earn interest every month, but you do not receive that interest until you redeem the bond. The bond's redemption value includes both your original purchase price and all the interest that has accumulated. When you cash it in, the entire interest portion becomes taxable income in that year.

The Treasury publishes redemption values monthly on TreasuryDirect.gov. You can check what your bond is worth before you redeem it, so you know exactly how much taxable interest you will report. The redemption value shown is the amount you will receive; subtract your original purchase price to find your taxable interest.

Why the Year You Redeem Matters for Your Tax Bill

Redeeming a bond in a low-income year can mean paying less tax on the interest than if you cashed it in a high-income year. If you retire mid-year or have a year with unusually low earnings, redeeming bonds then spreads the tax impact across a lower income total.

Conversely, if you redeem multiple bonds in the same year, you may push yourself into a higher tax bracket. Spacing redemptions across two or more years can keep each year's income lower and reduce your overall tax burden. This is especially useful if you hold several bonds that have matured or are no longer earning interest at the may provide rate.

Reporting Interest Annually Instead of at Redemption

You have the option to report EE bond interest every year as it accrues, rather than waiting until you redeem the bond. This is called the accrual method. If you choose it, you report a portion of the interest each tax year, even though you have not yet cashed in the bond.

The accrual method can lower your tax bill in the year you finally redeem the bond, because you have already paid tax on most or all of the interest. It also spreads the tax hit across multiple years instead of concentrating it in one. To use this method, you must elect it on your tax return in the first year you own the bond. Once you choose it, you must continue using it for all your savings bonds.

Most people do not use the accrual method because it requires paying tax on money they have not yet received. But if you hold bonds for many years and expect a very high-income year when you redeem them, switching to accrual earlier can be worth the extra paperwork.

State and Local Tax Treatment of EE Bonds

Federal tax is only part of the picture. Your state may also tax the interest on EE bonds, or it may exempt it entirely. States that do tax savings bond interest treat it the same way the federal government does—as ordinary income in the year you redeem the bond.

A few states, including Illinois, Iowa, Kansas, Mississippi, Missouri, and others, exempt interest on U.S. savings bonds from state income tax. If you live in one of these states, you owe federal tax but not state tax on your EE bond interest. If your state does tax it, you will report the same interest amount on both your federal and state returns.

Local taxes on savings bond interest are rare but possible in some cities and counties. Check your local tax authority's website or contact them directly if you are unsure whether your city or county taxes this income.

What Happens If You Redeem Before Five Years

Redeeming an EE bond before it has been held for five years triggers a penalty: you lose the last three months of interest. This is not a tax penalty—it is a reduction in the amount of interest you actually earned. The taxable interest you report is still based on what you actually received, which is less than if you had waited.

For example, if a bond would have been worth $55 at five years but you redeem it at four years and receive $52, your taxable interest is based on $52, not $55. The three-month interest penalty reduces both the amount you receive and the amount you owe tax on.

Keeping Records for Your Tax Return

When you redeem an EE bond through a bank or TreasuryDirect, you will receive a record of the transaction. Keep this documentation—it shows your original purchase price, the redemption value, and the interest earned. You will need it to calculate your taxable interest and to support your tax return if the IRS ever asks.

If you redeem bonds at a bank, ask for a written statement showing the redemption value. If you use TreasuryDirect, print or save your transaction history. The Treasury does not send you a Form 1099-INT unless you redeem more than $10 in interest in a single calendar year, so you may need to calculate the interest yourself and report it on your return.

Frequently Asked Questions

Do I have to pay tax on EE bonds if I never redeem them?

No. You owe tax only in the year you actually redeem the bond and receive the money. If you hold the bond until maturity or beyond without cashing it, you do not owe tax until redemption. However, EE bonds stop earning interest after 30 years, so holding them indefinitely does not increase the amount you will eventually owe tax on.

Can I use EE bond interest to pay for education and avoid taxes?

Yes, if you meet the requirements. If you redeem an EE bond in the same year you pay may have access to education expenses—tuition and fees at an accredited school—you may be able to exclude some or all of the interest from your taxable income. You must have been at least 24 years old when you bought the bond, and the bond must be in your name alone, not your child's. Consult a tax preparer to see if you may have access to.

What if I inherited EE bonds from someone else?

The person who owned the bond when they died owed tax on the interest earned up to that point. When you redeem the inherited bond, you owe tax only on the interest earned after their death. You will need the bond's redemption value on the date of death to calculate how much new interest you earned.

Will the Treasury send me a tax form when I redeem?

Only if you redeem more than $10 in interest in a single calendar year. In that case, you will receive a Form 1099-INT showing the interest amount. If you redeem less than $10 in interest, you must still report it on your tax return, but the Treasury will not send you a form.

Can I defer the tax by not cashing the bond right away?

Yes, but only until you actually redeem it. Once you cash in the bond, you owe tax that year. If you want to spread the tax across multiple years, you must either redeem different bonds in different years or switch to the accrual method before you redeem any of them.