How Are Savings Bonds Taxed? (2024)

How Are Savings Bonds Taxed?

According to Treasury Direct, interest from EEU.S. savings bondsis taxed at the federal level but not at the state or local levels for income. Bonds typically earn interest, which isthe amount that a bond can be redeemed for above its face value. The face value is the bond's original purchase price. The interest on savings bonds is also subject to federalgift, estate, and excise taxes. On the state level, the tax on the interest applies for estates or inheritances.

Key Takeaways

  • Interest from EEU.S. savings bondsis taxed at the federal level but not at the state or local levels for income.
  • The interest that savings bonds earn isthe amount that a bond can be redeemed for above its face value or original purchase price.
  • Savings bonds' interest is also subject to federalgift, estate, and excise taxes while at the state level, the tax applies for estates or inheritances.

Understanding How Savings Bonds Are Taxed

The ownership of the bond governs who is responsible for paying tax on the interest. If one person purchases the bond and is the sole owner for the life of the bond, that person owes the taxes on the interest. If a child is the sole owner, a parent may report the interest on the bond and pay the taxes on the parent's tax return.

However, there are ownership situations whereby the tax responsibility can vary. The taxes on interest for U.S. savings bonds are outlined under the section, tax considerations, on the Treasury Direct website.

Below are some of the ownership scenarios that can impact who pays the taxes on the interest for a savings bond. Please note that the tax rates can change depending on the policies of the U.S. Treasury and the Internal Revenue Service (IRS). Please consult a tax professional for your specific tax situation.

Another Owner Added by Purchaser

If one person purchases the bond and adds another person to the bond as co-owner whereby that person remains co-owner for the life of the bond,the purchaser is responsible for the taxes.

If one person purchases the bond and lists another person as the sole owner of the bond, the person listed as the owner is responsible for the interest.

Proportional Ownership

If two people split the purchase price of the bond, each person is responsible for the proportion of the taxes that represents the proportion of the ownership stake in the bond. For instance, if Jim and Bill purchase a $1,000 bond with Jim paying $400 and Bill paying $600, Jim is responsible for 40% of the taxes, and Bill is responsible for 60% of the taxes.

Exception to the Proportional Ownership Rule

The exception to the proportional rule is for spouses who live in community property statesand who are each responsible for half of the taxes if they file their taxes separately. Taxes may also be split if there is a succession of ownership.When a bond changes hands, the owners are each responsible only for the taxes on the portion of the interest that accrued during each period of ownership.

So, if Jill owned a bond from 2003 to 2007 before relinquishing it to Amy, who has owned it since, Jill must pay the taxes on the interest accrued between 2003 and 2007, and Amy must pay the taxes on interest earned after 2007.

Reporting the Interest for Taxes

Owners can wait to pay the taxes when they cash in the bond, when the bond matures, or when they relinquish the bond to another owner. Alternatively, they may pay the taxes yearly as interest accrues. Most owners choose to defer the taxes until they redeem the bond.

A bond that has reached maturity and stopped earning interest is automatically considered redeemed, and the interest amount is reported to the Internal Revenue Service. The income is interest income and is reported on a1099-INT,and the owner includes it on the yearly tax return.

If an owner decides to report the interest income yearly, the income from that bond and all other savings bonds for the same owner must continue to be reported yearly. The interest still accrues, in this case, and is not received. Once the bond reaches maturity, the owner must let the IRS know that the interest has been paid yearly.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.

How Are Savings Bonds Taxed? (2024)


How Are Savings Bonds Taxed? ›

How are savings bonds taxed? Savings bond interest is exempt from state and local income tax. Savings bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first.

How much tax do you pay on a savings bond? ›

The original amount you invested in the bond isn't taxed, but the interest earned is. The good news is “taxes are only owed to the federal government and not to any state governments, being that states do not tax interest on federal obligations,” says E.

How do I avoid taxes when cashing in savings bonds? ›

You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.

Are EE bonds taxed as capital gains? ›

Interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. The interest that savings bonds earn is the amount that a bond can be redeemed for above its face value or original purchase price.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-Year Value (Purchased May 1990)
$50 Bond$100$207.36
$100 Bond$200$414.72
$500 Bond$400$1,036.80
$1,000 Bond$800$2,073.60

Do I have to pay taxes on savings bonds I cashed in? ›

In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.

How are EE bonds taxed at maturity? ›

The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported. Note: Interest on EE bonds isn't subject to state income tax.

Is there a penalty for not cashing in matured EE savings bonds? ›

While the Treasury will not penalize you for holding a U.S. Savings Bond past its date of maturity, the Internal Revenue Service will. Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity.

Will I get a 1099 for cashing in savings bonds? ›

At a bank: If a bank cashes your savings bond, they are responsible for getting you a 1099-INT. They may give or mail you the 1099-INT as soon as you cash the bond or they may wait until the following January.

What is the best way to cash in savings bonds? ›

If you have paper savings bonds, you can fill out the appropriate form and mail it and the bonds you want to cash to the Treasury Retail Securities Services — the address is listed on FS Form 1522. Additionally, you may be able to cash your paper savings bonds at your bank or credit union.

When should I cash in my series EE bonds? ›

You can cash in (redeem) your EE bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.

Who pays taxes on EE savings bonds? ›

If ownership has not changed
SituationWho owes the tax
You use your money to buy a bond that you put in your name with a co-ownerYou owe the tax
You buy the bond but someone else is named as the only owner (for example, your child)The person who is named as the owner (not you)
3 more rows

What happens to EE bonds after 30 years? ›

EE bonds earn interest until the first of these events: You cash in the bond or it reaches 30 years old. Therefore, many of these bonds have stopped earning interest. If you moved your EE bond into a TreasuryDirect account, we pay you for the bond as soon as it reaches 30 years and stops earning interest.

Do savings bonds double every 7 years? ›

In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).

How much is a $50 Patriot bond worth after 20 years? ›

After 20 years, the Patriot Bond is guaranteed to be worth at least face value. So a $50 Patriot Bond, which was bought for $25, will be worth at least $50 after 20 years. It can continue to accrue interest for as many as 10 more years after that.

Are bonds or CDs better? ›

After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.

How long does it take for a $50 savings bond to mature? ›

They're available to be cashed in after a single year, though there's a penalty for cashing them in within the first five years. Otherwise, you can keep savings bonds until they fully mature, which is generally 30 years.

How to avoid tax on savings accounts? ›

Strategies to avoid paying taxes on your savings
  1. Leverage tax-advantaged accounts. Tax-advantaged accounts like the Roth IRA can provide an avenue for tax-free growth on qualified withdrawals. ...
  2. Optimize tax deductions. ...
  3. Focus on strategic timing of withdrawals. ...
  4. Consider diversifying with tax-efficient investments.
Jan 11, 2024

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