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.
FAQs
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 do I avoid paying taxes on 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.
How are EE bonds taxed when redeemed? ›
Key Takeaways. 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 Value | Purchase Amount | 30-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 |
May 7, 2024
The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate. Bonds held for more than a year will be subject to potentially lower long-term capital gains rates.
How much tax will I pay on my EE savings bonds? ›
The interest on EE bonds isn't taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn't made so bond holders receive the benefits of tax deferral.
Will I get a 1099 for cashing in savings bonds? ›
If you cash a paper savings bond at a local bank, that bank is responsible for giving you a 1099. If you cash a paper savings bond by mailing it to Treasury Retail Securities Services, we mail you a 1099 by January 31 of the following year. (You can call us for a duplicate statement, if needed, beginning February 15.)
Is it a good time to cash in 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.
What happens to EE bonds after 30 years? ›
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. If you still have a paper EE bond, check the issue date. If that date is more than 30 years ago, it is no longer increasing in value and you may want to cash it.
How are inherited EE bonds taxed? ›
You report the interest that accumulated on the bond during the bondholder's lifetime on their final tax return. The estate would be responsible for paying any tax due and going forward, you'd owe tax on any interest that continues to accrue on reissued bonds.
All Series EE Bonds reach final maturity 30 years from issue.
Are bonds or CDs better? ›
Bonds often offer higher interest rates than CDs, which may be appealing to those looking for a higher profit potential. Unlike CDs, where interest may accumulate and only be paid at maturity, bonds often provide ongoing interest payments, usually at monthly or quarterly intervals.
Can I cash a savings bond after 10 years? ›
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. These days, you can only purchase electronic bonds, but you can still cash in paper bonds.
Do I need to report I bonds on my tax return? ›
I cashed some Series E, Series EE, and Series I savings bonds. How do I report the interest? 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.
Who pays taxes on savings bonds? ›
If ownership has not changed
| Situation | Who owes the tax |
|---|
| You are the only owner of the bond | You owe the tax |
| You use your money to buy a bond that you put in your name with a co-owner | You owe the tax |
3 more rowsYou can take the tax exclusion if you meet all of these conditions: You were 24 years old or older before the bonds were issued. Your modified adjusted gross income is less than the cut-off amount that the IRS sets for the year in which you want to take the exclusion. The cut-off amount may change each year.
Do I pay taxes on i-bonds if I don't cash out? ›
Yes, I bonds are subject to taxation. But they provide certain tax benefits that distinguish them from other investments and can result in lower tax payments. The original amount you invested in the bond isn't taxed, but the interest earned is.
How can I cash a bond without paying taxes? ›
You can take the tax exclusion if you meet all of these conditions: You were 24 years old or older before the bonds were issued. Your modified adjusted gross income is less than the cut-off amount that the IRS sets for the year in which you want to take the exclusion. The cut-off amount may change each year.
On what bonds will you not have to pay federal taxes? ›
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes.
Do I have to pay tax on inherited savings bonds? ›
As a result, when inheritors redeem inherited bonds on which the tax has been deferred, they will owe tax on all the interest that has accumulated.
