If you've already learned about Series EE savings bonds and you know how savings bond interest rates are determined, you'll want to learn about some of the major tax advantages.
Key Takeaways
- Series EE savings bonds earnings can be exempt from state and local taxes.
- If you invest in Series EE savings bonds for college, you can exclude part or all of the interest you earn over decades from your income taxes when the bonds are redeemed.
- When investing for education, you can also put the Series EE savings bonds in the name of your child with the parents (you) listed as the beneficiary (not co-owner).
Exempt From State and Local Income Taxes
One big benefit of Series EE savings bonds is that they are exempt from state and local taxes. This is very important if you are in a high-income tax bracket or live in a state such as New York that levy a substantial income tax rate on high earners. The bottom line is that it a bond that's exempt from state and local taxes means more money in your pocket.
Defer Income Taxes Until Redemption or Up to 30 Years
You can choose to report the interest your bond earns each year on your taxes, or wait until you redeem the bond. If you elect to wait, you can defer payment of taxes on the interest income of your Series EE savings bonds until you redeem the bond, whether after one year or when the bond matures at 30 years.
Each savings bond is a zero-coupon bond. That means that you don't actually get checks in the mail for the interest you are owed like you would with a corporate bond or municipal bond. Instead, the value of the interest owed to you is added to the bond principal, and you get the interest when the bond matures or you redeem it.
Note
Series EE savings bonds will pay interest for up to 30 years from the date they are issued.
Tax Benefits Based on Qualified Education Expenses
If you invest in Series EE savings bonds for college or other qualified education expenses, you can exclude part or all of the interest you earn over decades from your income taxes when you redeem the bonds. Some of the rules for this exclusion include:
- You must redeem the Series EE savings bond in the same year you incur the expenses for post-secondary education, such as tuition and fees.
- You must have been at least 24 years old before the bonds were issued.
- The bonds must be registered directly in your name, or in your and your spouse's name if you are married.
- Your filing status is not married filing separately.
- For tax year 2022, your modified adjusted gross income (MAGI) has to be less than $158,650 if married and filing jointly and $100,800 for all other filing statuses.
- The post-secondary institution that you attend must qualify for the Series EE savings bond program by being a university, college, or vocational school that meets federal assistance standards by offering programs such as guaranteed student loans from the Department of Education.
Note
Qualified educational expenses and fees include tuition and fees, lab fees, and books. Room and board are not considered qualified education expenses.
The amount of qualified expenses is reduced by the sum of any tuition reduction the student received, including scholarships, employer-provided educational assistance, and fellowships. Both the principal and the interest of the EE savings bonds must be used to pay the qualified expenses to exclude the interest from your taxable income.
If your bond proceeds exceed your qualified education expenses, then you get a prorated interest exclusion based on the percentage of your expenses compared to your bond. For example, if your expenses were $7,000 and your bond proceeds were $8,000 ($4,000 principal, $4,000 in interest), you'd get to exclude 80% of the interest you earned, or $3,200.
Frequently Asked Questions (FAQs)
How do I avoid paying taxes on EE bonds?
You may be able to avoid taxes on EE bond interest, generally speaking, if you paid for qualified education expenses with your bond proceeds in the year that you redeem the bond.
What is the benefit of EE bonds?
EE bonds give you a safe way to invest money. If you hold on to the bond for at least, it will double in value. Additionally, you can avoid taxation on some or all of the interest you receive when you redeem the bond if you have qualified education expenses you paid for with your bond proceeds.
FAQs
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.
Which is an advantage of investing in Series EE US savings bonds? ›
One of the most attractive benefits of EE bonds is the guaranteed return. The U.S. Treasury pledges that these bonds will double in value if held for 20 years, translating to an effective interest rate of about 3.5% per year over that period.
Do EE bonds really double in 20 years? ›
EE bonds you buy now have a fixed interest rate that you know when you buy the bond. That rate remains the same for at least the first 20 years. It may change after that for the last 10 of its 30 years. We guarantee that the value of your new EE bond at 20 years will be double what you paid for it.
Are Series EE bonds taxable on redemption? ›
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.
What is the downside to EE bonds? ›
Inflation Risk. Inflation risk is another drawback of Series EE bonds. If the rate of inflation outpaces the interest rate earned on the bonds, the purchasing power of the bondholder's principal and interest payments may decline over time.
Are EE bonds taxed as income or capital gains? ›
Interest from your bonds goes on your federal income tax return on the same line with other interest income.
How much is a $100 series EE 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 |
If you want full value, you should hold the Series EE bonds at least until maturity, and if you want extra, you can hold them until 30 years. But once 30 years have passed, it's a good idea to cash them in because you won't get any extra benefit.
Is it a good time to cash in Series EE savings bonds? ›
You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
How long does it take for a $100 EE savings bond to mature? ›
All Series EE bonds reach final maturity 30 years from issue. Series EE savings bonds purchased from May 1995 through April 1997 increase in value every six months.
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.
Can you still cash EE bonds at a bank? ›
Where do I cash in a savings bond? You can cash paper bonds at a bank or through the U.S. Department of the Treasury's TreasuryDirect website. Not all banks offer the service, and many only provide it if you are an account holder, according to a NerdWallet analysis of the 20 largest U.S. banks.
How do I avoid paying taxes on Series EE bonds? ›
You can exclude the interest from your series EE and series I U.S. savings bonds on Form 8815 of the 1040. Form 8815 helps calculate the amount of interest that you can exclude from your tax return. If all the interest was not used for a qualified higher education expense you will stay pay taxes on that amount.
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 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.)
What bonds have the best tax benefits? ›
Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they're exempt from state and local income taxes. 89 But corporate bonds don't have any tax-free provisions, and, as such, are better off in tax-advantaged accounts.
What happens to EE bonds after 30 years? ›
Series EE and Series I bonds no longer earn interest when they reach maturity 30 years from the date of issuance. If you have any bonds older than 30 years, we recommend cashing them in immediately because they are no longer earning interest.
Which of the following is not a tax advantage of a series EE savings bond? ›
Answer and Explanation: The tax advantage of a series EE saving bonds is that it helps to free from state tax, defer tax until it is recovered, and benefit the tax for educational uses. But the discount on the bond is not amortized it can be matured.
