Interest on U.S. government bonds is taxable at the federal level, but the tax treatment depends on which type of bond you own

The interest you earn from Treasury bonds, Treasury notes, Treasury bills, and Series I or EE savings bonds is subject to federal income tax. You report this interest as ordinary income on your federal tax return in the year you receive it. However, interest from U.S. government bonds is exempt from state and local income taxes — a significant difference from corporate bonds or bond funds.

The type of bond you hold determines when you pay tax on the interest. Treasury securities (bonds, notes, and bills) pay interest twice a year, and you owe federal tax on each payment in the year you receive it. Series I and EE savings bonds work differently: the interest accrues but you don't receive it until you cash the bond, so you defer the federal tax until that year.

Key Takeaways

  • Interest from Treasury bonds, notes, and bills is taxable at the federal level but exempt from state and local income taxes.
  • Treasury securities pay interest semiannually, and you report that interest on your federal return in the year you receive it.
  • Series I and EE savings bonds defer federal tax until you redeem the bond, allowing you to spread the tax liability across years if you hold them long enough.
  • The principal amount you paid for the bond is never taxed — only the interest earnings are subject to federal income tax.

How Treasury bonds, notes, and bills are taxed

When you own a Treasury bond, note, or bill, the U.S. Department of the Treasury pays you interest on a set schedule. Treasury bonds and notes pay interest twice per year. Treasury bills (which mature in one year or less) are sold at a discount and pay no periodic interest; instead, you receive the full face value at maturity, and the difference between what you paid and what you receive counts as taxable interest.

You must report all Treasury interest as ordinary income on your federal tax return (Form 1040) in the tax year you receive it. The interest is taxed at your regular income tax rate — the same rate that applies to wages or other income. Your brokerage or the Treasury will send you a Form 1099-INT showing the interest you received during the year, which you use to complete your return.

Because Treasury interest is exempt from state and local income taxes, residents of high-tax states like California, New York, and Massachusetts see a meaningful benefit. If you live in a state with a 5 percent income tax and earn $1,000 in Treasury interest, you owe federal tax on that $1,000 but no state tax — saving you $50 on that interest alone.

Tax treatment of Series I and EE savings bonds

Series I and EE savings bonds are issued by the Treasury but taxed differently than Treasury securities. These bonds do not pay interest to you directly. Instead, the interest accrues (builds up) inside the bond while you hold it. You do not receive the interest until you redeem (cash in) the bond.

When you cash the bond, you receive the face value plus all accrued interest. The accrued interest is taxable as ordinary income in the year you redeem the bond. This means you can hold a Series I or EE bond for 20 or 30 years, and all the tax on the interest is due in the single year you cash it in. Some people use this feature to their advantage: if you expect to have lower income in a particular year, you can time the redemption to that year and pay tax at a lower rate.

Series I and EE bonds also offer an alternative: if you use the proceeds to pay for 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 federal taxation. This is called the Education Savings Bond Program. The bond must have been issued to someone age 24 or older, and the education expenses must occur in the same year you redeem the bond. You report this on Form 8815.

State and local tax exemption for all government bonds

Every type of U.S. government bond — Treasury bonds, notes, bills, Series I, and Series EE — is exempt from state and local income taxes. This exemption is set by federal law and applies regardless of which state you live in or where you purchased the bond.

This exemption does not explore to bond funds or ETFs that hold government bonds. If you own a mutual fund or exchange-traded fund that invests in Treasuries, the fund itself is not exempt from state tax, and you will owe state tax on any distributions the fund pays to you. Only direct ownership of the bonds themselves qualifies for the exemption.

The difference between principal and interest

When you buy a Treasury bond or savings bond, you pay a price (the principal). The interest is the earnings on top of that principal. Only the interest is taxable — the principal is never taxed, because it is your own money that you invested.

If you buy a Treasury bond at a discount (for less than its face value) and hold it to maturity, the difference between what you paid and what you receive at maturity is treated as interest and is taxable. If you sell a Treasury bond before maturity for more than you paid, the gain is taxed as a capital gain, not as interest. Capital gains are taxed differently than interest income and may be taxed at a lower rate if you held the bond for more than one year.

Reporting Treasury interest on your tax return

Your brokerage, bank, or the Treasury will send you a Form 1099-INT by January 31 of the following year, showing all interest you received during the tax year. You use this form to report the interest on your federal return. If you own Treasury bonds directly through TreasuryDirect (the government's online platform), the Treasury sends you the 1099-INT.

You report the interest on line 1b of Form 1040 (ordinary interest income). If you received more than $1,500 in interest from all sources combined, you must also complete Schedule B and attach it to your return. The interest is added to your other income and taxed at your marginal tax rate.

How inflation-adjusted bonds affect your tax bill

Series I bonds pay interest that adjusts with inflation. The interest rate changes every six months based on the Consumer Price Index. You still report all accrued interest as taxable income in the year you redeem the bond, regardless of how the rate changed during your holding period.

Series I bonds also have a quirk: the interest accrues monthly, but you only receive it when you cash the bond. If you redeem a Series I bond before holding it for five years, you lose the last three months of interest as a penalty. This penalty does not reduce your taxable income — you straightforward do not receive that interest at all.

Frequently Asked Questions

Do I owe federal tax on Treasury interest if I have no other income?

Yes. Treasury interest is taxable federal income regardless of whether you have other income. However, if your total income is below the standard deduction for your filing status, you may not owe any tax. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing jointly. You should still file a return to report the interest.

What if I bought a Treasury bond at a discount and sold it before maturity?

The gain you made (the difference between what you paid and what you sold it for) is taxed as a capital gain, not as interest. If you held the bond for more than one year, it is a long-term capital gain and may be taxed at a lower rate than ordinary income. You report this on Schedule D of your tax return.

Can I avoid paying tax on Treasury interest by holding the bond in a retirement account?

Yes. If you own Treasury bonds inside a traditional IRA, 401(k), or other may have access to retirement account, the interest accrues tax-free inside the account. You pay federal tax on the money only when you withdraw it from the account in retirement. This is one reason some people hold bonds in retirement accounts.

Do I owe tax on Series EE bond interest if I never cash the bond?

No tax is due until you redeem the bond. However, Series EE bonds mature after 30 years, and at that point the interest stops accruing. If you still have not cashed the bond, you should do so to receive your money, and you will owe tax on all accrued interest in that year.

Is the interest on Treasury bonds taxed differently if I inherited them?

The interest is still taxable to you in the year you receive it, but the stepped-up basis rules may explore to the principal. If you inherited the bond, the principal is valued at its fair market value on the date of death, and you do not owe capital gains tax on any appreciation that occurred before you inherited it. You still owe federal income tax on all interest earned after you inherited the bond.