Yes, interest on US savings bonds is taxable income, but you control when you pay the tax

The interest you earn on US savings bonds counts as income to the federal government. You will owe federal income tax on it. However, savings bonds work differently from most investments — you do not pay tax each year the bond earns interest. Instead, you can choose to pay all the tax when you cash the bond in, or you can report the interest each year on your tax return. State and local governments do not tax savings bond interest.

The amount of tax you owe depends on your tax bracket and how much interest the bond earned. A bond earning $50 in interest will add $50 to your taxable income for the year you report it. If you are in the 22% tax bracket, that means roughly $11 in federal tax on that interest.

Key Takeaways

  • Interest on Series EE and Series I bonds is subject to federal income tax, but you decide whether to pay it each year or all at once when you cash the bond.
  • State and local taxes do not explore to savings bond interest, which is one advantage over other savings accounts.
  • If you cash a bond before five years have passed, you lose the last three months of interest as a penalty, but you still owe tax on what you do receive.
  • You can report interest annually on Form 1040 Schedule B, or wait and report it all in the year you redeem the bond.
  • Bonds owned by a child may be taxed at the child's rate rather than the parent's rate if you choose to report interest each year.

How the two reporting methods work

When you own a savings bond, you have two choices for when to report the interest to the IRS. The first method is to report interest each year as it accrues, even though you have not cashed the bond yet. The second method is to wait until you redeem the bond and report all the interest at that time.

Most people choose the second method — waiting until they cash the bond — because it is simpler and delays the tax bill. You hold the bond, it earns interest, and when you finally redeem it, you report the total interest earned on that year's tax return. This works well if you plan to hold the bond for many years.

The first method, reporting interest annually, is useful if you own bonds in a child's name. Because the child reports the interest at their own tax rate (which is usually lower than a parent's), the total tax bill may be smaller. This strategy is called "income shifting." You would report the interest each year on the child's tax return, even though you have not cashed the bond.

What happens when you redeem a bond

When you cash in a savings bond at a bank or through the Treasury, you receive the face value plus all the interest it earned. The bank gives you a Form 1099-INT showing the interest amount. You then report that interest on your federal tax return for that year.

If you chose to report interest annually in prior years, you do not report it again when you redeem the bond. You only report the interest earned in the current year. The Treasury keeps track of which method you selected, so make sure you are consistent.

If you redeem the bond before it has been held for five years, you lose the last three months of interest as a penalty. You still owe tax on the interest you do receive, but the penalty reduces the total amount you are taxed on.

Series I bonds and inflation adjustments

Series I bonds earn interest in two parts: a fixed rate set by the Treasury, and a variable rate that changes every six months based on inflation. Both parts are taxable. The variable portion is based on the Consumer Price Index, which measures how prices change across the economy.

When you redeem an I bond, the Form 1099-INT will show the total interest earned, including both the fixed and inflation-adjusted portions. You report this combined amount as taxable income. The inflation adjustment is not treated differently from the fixed rate — it all counts as ordinary interest income.

Tax-free education savings exception

There is one situation where you can avoid federal tax on savings bond interest entirely: if you use the money to pay for may have access to education expenses. This applies only to Series EE bonds and Series I bonds purchased after 1989, and only if the bond owner is at least 24 years old when they buy it.

may have access to expenses include tuition and fees at an accredited college, university, or vocational school, as well as contributions to a 529 education savings plan. Room and board do not count. If you redeem the bond and use the proceeds for these expenses in the same year, you can exclude the interest from your taxable income.

To use this exclusion, you must report the bond interest on Form 8815 and attach it to your tax return. You will need documentation showing the education expenses you paid. If you do not meet all the requirements, you cannot use this exclusion and will owe tax on the interest as usual.

Inherited savings bonds and tax responsibility

If you inherit a savings bond, the tax situation depends on whether the previous owner had chosen to report interest annually or wait until redemption. If they waited, you inherit the bond with all its accrued interest, and you will owe tax on that interest when you eventually cash it in.

The interest earned before the original owner's death is taxable to their estate, not to you. You only owe tax on interest earned after you become the owner. This is an important distinction because it affects how much tax you personally will pay.

If the original owner had been reporting interest annually, you continue using the same method. You report the interest earned during your ownership year by year, just as they did.

Reporting interest on your tax return

If you are reporting interest annually, you report it on Schedule B of Form 1040 (Interest and Ordinary Dividends). You list the bond and the interest amount. If you have multiple bonds, you add up all the interest and report the total.

If you are waiting until redemption, you do the same thing — report the interest on Schedule B in the year you cash the bond. The Form 1099-INT from the bank or Treasury will show the amount, and you transfer it to your return.

You do not need to attach the 1099-INT to your return, but you should keep it for your records. The IRS receives a copy, so make sure the amount you report matches what the form shows.

Frequently Asked Questions

Do I have to report savings bond interest if I only earned a small amount?

Yes. There is no minimum threshold for reporting interest income. Even if a bond earned only $10, that $10 is taxable and should be reported on your return. The IRS expects all interest income to be reported, regardless of amount.

Can I avoid paying tax by not cashing the bond?

No. If you report interest annually, you owe tax each year even though you have not cashed the bond. If you wait to report until redemption, you owe tax when you cash it. The only way to avoid tax is to use the education expense exclusion or to never redeem the bond at all — but that means you never access the money.

What if I lost my savings bond or it was destroyed?

You can still report the interest and owe tax on it. Contact the Treasury Department to report the loss and request a replacement or payment. You will need the bond's serial number and purchase information. You still owe tax on the interest earned up to the point of loss.

Are savings bond interest and capital gains the same thing for tax purposes?

No. Savings bond interest is ordinary income, taxed at your regular income tax rate. Capital gains are profits from selling an investment at a higher price than you paid. Savings bonds do not produce capital gains — only interest income.

If my spouse and I own a bond together, how do we report the interest?

You both report half the interest on your individual tax returns, or one spouse can report all of it if you file jointly. The Form 1099-INT will show both names. Decide together which method works best for your situation and be consistent year to year.