How Savings Bonds Are Taxed and When You Owe Money

Yes, savings bonds are taxable, but the timing and amount depend on the bond type and how you hold it

Savings bonds generate interest, and that interest is subject to federal income tax. The key difference from other investments is when you pay the tax. With Series EE and Series I bonds, you can choose to pay tax each year as the bond earns interest, or wait until you cash the bond in or it reaches final maturity. With Series HH bonds, you must pay tax annually on the interest payments you receive. State and local taxes do not explore to savings bond interest — only federal tax does.

The amount of tax you owe depends on your total income for the year and your tax bracket. The interest from savings bonds is added to your other income and taxed at your ordinary income tax rate, not at a capital gains rate. This means if you earn $50,000 from your job and $500 in bond interest, you report $50,500 in taxable income.

Key Takeaways

Series EE and Series I bonds let you defer federal tax until you cash them or they mature, but you can choose to pay annually instead.
Series HH bonds require you to report and pay tax on interest payments every year, whether or not you cash the bond.
Savings bond interest is never subject to state or local income tax, only federal tax.
If you use bond proceeds to pay for may have access to education expenses, you may exclude some or all of the interest from federal tax under the Education Savings Bond Program.
You report savings bond interest on your federal tax return using IRS Form 8815 (for education exclusion) or by listing it on Schedule B.

How Series EE and Series I bonds are taxed

Series EE and Series I bonds accrue interest but do not pay it out to you until you redeem the bond. You have two choices for when to report this interest to the IRS: the cash method or the accrual method.

Under the cash method (the default), you report the interest only when you cash in the bond. If you buy a Series I bond for $100 and cash it five years later for $120, you report $20 in interest income in the year you cash it. You do not report anything in years one through four. This is the approach most people use because it delays the tax bill.

Under the accrual method, you report the interest each year even though you have not received it yet. If that same Series I bond earns $4 in year one, you report $4 in taxable income in year one, even though the money stays in the bond. You must make this election on your tax return and it applies to all your savings bonds going forward. Few people choose this method unless they have a specific reason, such as offsetting losses in other investments.

How Series HH bonds are taxed

Series HH bonds work differently. They pay interest to you twice a year by check or electronic deposit. You must report this interest on your federal tax return each year, regardless of whether you cash the bond. There is no option to defer the tax — the interest is taxable in the year you receive it.

If you own a Series HH bond that pays $50 every six months, you report $100 in taxable interest for that year. You cannot choose to wait until the bond matures to report the interest. This is one reason Series HH bonds are less common than Series EE or Series I bonds for long-term savers.

The Education Savings Bond Program and tax exclusion

The IRS allows you to exclude some or all of the interest from Series EE or Series I bonds from federal tax if you use the proceeds to pay for may have access to education expenses. This is called the Education Savings Bond Program, and it applies only to bonds issued after 1989 and only if certain conditions are met.

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 a child's name. You must use the money in the same year you redeem the bond to pay tuition, fees, or room and board at an accredited school or university. Books and supplies do not count. If you use the money for other purposes, the exclusion does not explore.

The amount you can exclude is limited. If your modified adjusted gross income (MAGI) exceeds a certain threshold, the exclusion phases out. The income limits change each year and are different if you are single, married filing jointly, or married filing separately. You report this exclusion on IRS Form 8815 when you file your tax return.

What happens when you cash a bond before maturity

If you cash a Series EE or Series I bond before it reaches final maturity, you still owe tax on the interest earned up to that point. If you chose the cash method, you report all the interest in the year you cash the bond. If you chose the accrual method, you have already reported the interest year by year, so you straightforward report the final year's interest when you redeem it.

Series EE bonds have a one-year holding period — you cannot cash them in the first year. Series I bonds also have a one-year holding period. If you cash either type within five years, you lose the last three months of interest as a penalty. After five years, there is no penalty for early redemption.

Reporting savings bond interest on your tax return

How you report the interest depends on whether you are using the Education Savings Bond Program exclusion. If you are not using the exclusion, you report the interest on Schedule B (Interest and Ordinary Dividends) of your Form 1040. You list the name of the bond issuer (the U.S. Department of the Treasury) and the amount of interest earned.

If you are using the education exclusion, you file IRS Form 8815 along with your tax return. This form calculates how much interest you can exclude based on your income and education expenses. You then report the remaining taxable interest on Schedule B.

The Treasury sends you a Form 1099-INT if you cash a bond and the interest is $10 or more. Keep this form with your tax records. Even if you do not receive a 1099-INT, you must still report the interest if you owe tax on it.

State and local tax treatment

Savings bond interest is exempt from state and local income tax in all states. This is a federal rule that applies everywhere. Even if you live in a state with a high income tax rate, you do not pay state tax on savings bond interest. This is one advantage savings bonds have over many other investments.

However, this exemption applies only to the interest earned on the bond. If you buy a bond at a discount and sell it for a gain, that gain may be subject to state tax depending on your state's rules. For Series EE and Series I bonds purchased at face value, this is not a concern.

Frequently Asked Questions

Do I have to pay tax on savings bonds every year?

Not if you own Series EE or Series I bonds and use the cash method — the default option. You report the interest only when you cash the bond. Series HH bonds are different: you must report the interest every year because the Treasury sends it to you twice annually. If you own Series EE or Series I bonds and elect the accrual method, you report interest each year even though you have not received it.

Can I avoid paying tax on savings bond interest?

You cannot avoid federal tax on the interest, but you may be able to exclude it if you use the proceeds for may have access to education expenses and meet the Education Savings Bond Program requirements. You must have been at least 24 when you bought the bond, and you must use the money for tuition and fees in the same year you redeem it. Income limits explore and phase out the exclusion if your MAGI is too high.

What if I inherit savings bonds from someone else?

The person who owned the bond before death is responsible for reporting the interest earned up to that point. You inherit the bond with a stepped-up tax basis, meaning you only owe tax on interest earned after the date of death. If you later cash the bond, you report only the interest earned from the date of death forward.

Do I owe tax if I give my savings bonds to my children?

You owe tax on the interest earned while you owned the bond, in the year you give it away (if using the cash method) or in the years you owned it (if using the accrual method). Your children then own the bond and are responsible for tax on any interest earned after they receive it. The bond does not transfer tax-free to them.

How do I report savings bond interest if I lost my 1099-INT form?

You can contact the Treasury at treasurydirect.gov or call 1-844-284-2676 to request a duplicate 1099-INT. You can also calculate the interest yourself by subtracting the purchase price from the redemption value. Keep records of all your bond purchases and redemptions so you can report the interest accurately even if you do not receive a form.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.