Federal income tax on savings bonds

You owe federal income tax on the interest your savings bonds earn, but you have a choice about when to pay it. You can report the interest each year as it accrues (the year-by-year method), or you can wait and report all the interest at once when you cash the bond or it reaches final maturity (the deferred method). Most people choose to defer because it delays the tax bill.

The interest is taxed as ordinary income at your regular federal tax rate, not at a lower capital gains rate. If you bought a Series EE bond for $50 and it is worth $75 when you redeem it, that $25 difference is taxable income. The IRS does not distinguish between bonds you bought recently and bonds you have held for decades — the tax rate is the same either way.

Key Takeaways

  • You can defer federal income tax on savings bond interest until you cash the bond or it stops earning interest, which delays your tax bill by decades if you hold long-term bonds.
  • Interest from savings bonds is taxed as ordinary income at your full federal tax rate, not at preferential capital gains rates.
  • State and local income taxes do not apply to savings bond interest, which is one of the few tax advantages bonds offer.
  • If you use bond proceeds to pay for education expenses, you may be able to exclude some or all of the interest from federal tax under the Education Savings Bond Program.
  • Reporting the interest each year instead of deferring it can sometimes lower your total tax if your income varies year to year.

State and local income tax exemption

Savings bond interest is exempt from state and local income taxes in every state. This is one of the clearest tax advantages of bonds compared to savings accounts, money market accounts, or CDs, which are all subject to state tax where you live. If you live in a state with a high income tax rate, this exemption can add up over time.

The exemption applies to all types of savings bonds — Series EE, Series I, and Series HH. It does not matter whether you bought the bonds in your home state or another state. The federal government sets this rule, and it overrides state law.

The education savings bond tax exclusion

If you use the proceeds from Series EE or Series I bonds to pay for may have access to education expenses in the same year you redeem them, you may be able to exclude some or all of the interest from federal income tax. may have access to expenses include tuition and fees at an accredited school or university, as well as contributions to a 529 plan or Coverdell Education Savings Account.

To use this exclusion, you must have been at least 24 years old when you bought the bond. The bond must be registered in your name alone or in your name and your spouse's name — not in your child's name. The exclusion phases out if your modified adjusted gross income (MAGI) exceeds a certain threshold, which changes each year. For 2024, the phase-out range for single filers begins at $85,800 and ends at $100,800; for married filing jointly, it begins at $135,600 and ends at $165,600. These thresholds increase slightly each year.

You do not have to use this exclusion. If your income is too high to claim it, or if you simply prefer to report the interest as taxable income, you can do so. The choice is yours each time you redeem a bond.

Timing of the tax bill when you cash bonds

If you chose the deferred method when you bought your bond, all the accrued interest becomes taxable in the year you redeem it. This means a single large tax bill in that year, which can push you into a higher tax bracket. If you have other income that year — a bonus, a side business, or a large capital gain — the bond interest stacks on top and increases your total tax.

You report the interest on your federal tax return for the year you cash the bond. You do not need to file a special form; the interest is reported as part of your ordinary income on Form 1040. If the bond issuer (the U.S. Treasury) sends you a Form 1099-INT, use that to verify the amount, though you may need to calculate it yourself if the form is not issued.

Bonds held to final maturity

Series EE bonds stop earning interest after 30 years. Series I bonds stop earning interest after 30 years as well. If you have not cashed the bond by that date, you must report all the accrued interest on your tax return for that year, even if you never touch the money. The bond sits in your account earning nothing, but the tax bill arrives.

This is another reason to decide in advance whether you will use the year-by-year reporting method or the deferred method. If you plan to hold a bond for 20 or 30 years and then cash it, deferring the tax means one large bill at the end. If you plan to hold it that long and want to spread the tax over time, you should report the interest each year starting from the year you bought it.

When year-by-year reporting makes sense

Reporting the interest each year is less common, but it can lower your total tax if your income varies significantly from year to year. If you expect to have a low-income year — a sabbatical, a career change, or retirement — you might report some of the bond interest in that year when your tax bracket is lower, and defer the rest to higher-income years.

Once you choose the year-by-year method for a bond, you must stick with it for the life of that bond. You cannot switch back to deferring. You report the interest using Form 8815 (Exclusion of Series EE and I U.S. Savings Bond Interest) or by attaching a statement to your return. The amount to report is the increase in the bond's redemption value from the prior year, which you can find on the Treasury's website or by contacting the issuer.

Inherited savings bonds and tax responsibility

If you inherit a savings bond, the tax treatment depends on whether the previous owner had deferred the interest or reported it year by year. If they deferred, you inherit the full tax liability — all the accrued interest becomes taxable to you in the year you redeem the bond or in the year the bond reaches final maturity, whichever comes first.

The original owner's estate may have reported some or all of the interest on their final tax return, which reduces what you owe. Ask the executor or the person managing the estate whether they reported any bond interest. If they did, you only owe tax on the interest that accrued after their death.

Frequently Asked Questions

Can I avoid paying federal tax on savings bond interest?

No, but you can defer it. All savings bond interest is subject to federal income tax. You can delay paying the tax until you cash the bond or it reaches final maturity, but you cannot avoid it entirely. The education savings bond exclusion is the only way to reduce your federal tax, and it only works if you meet strict requirements.

What is the difference between deferring taxes and the year-by-year method?

Deferring means you report all the interest in the year you cash the bond. Year-by-year means you report the interest each year, even if you do not cash the bond. Deferring delays your tax bill but creates a larger bill in a single year. Year-by-year spreads the tax over time but requires you to file more complex returns.

Do I have to report savings bond interest if the amount is small?

Yes. There is no minimum threshold for reporting interest income. Even if your bond earned only $10 in interest, you must report it on your federal tax return. The IRS expects all income to be reported, regardless of amount.

What happens if I cash a bond before it matures?

You still owe federal income tax on all the interest that accrued up to the redemption date. If you used the deferred method, you report it all in the year you cash the bond. If you used year-by-year reporting, you have already reported most of it; you just report the interest from the last year you held it.

Are savings bonds a good investment for tax reasons?

The state and local tax exemption is valuable, especially if you live in a high-tax state. However, the interest rates on savings bonds are usually lower than other savings vehicles, and the federal tax treatment is not preferential. Weigh the tax benefit against the lower yield before deciding whether bonds fit your savings plan.