Yes, savings bond interest is taxable income, but the timing and type of tax depend on which bond you own

Interest earned on U.S. savings bonds counts as income to the federal government. You owe federal income tax on it. However, you do not owe state or local income tax on savings bond interest — that is a real advantage compared to other savings vehicles. The catch is that you have choices about when you pay the tax, and those choices matter.

The two main types of savings bonds — Series EE and Series I — are taxed the same way federally, but the interest works differently. Series EE bonds are sold at a discount and reach face value at maturity. Series I bonds pay interest that adjusts every six months based on inflation. In both cases, the interest is taxable, but you decide whether to report it each year or wait until you cash the bond.

Key Takeaways

  • Federal income tax applies to all savings bond interest, but state and local income taxes do not.
  • You can report interest yearly as it accrues, or wait and report it all at once when you redeem the bond.
  • If you redeem a bond before five years, you lose the last three months of interest as a penalty.
  • Interest used to pay for may have access to education expenses may be excluded from federal tax under specific conditions.
  • The IRS Form 8818 lets you switch from one reporting method to the other, but the switch applies to all your bonds of that series.

How the two reporting methods work

The IRS gives you two paths: annual reporting or reporting at redemption. Most people choose reporting at redemption because it delays the tax bill, but annual reporting can make sense if you are in a lower tax bracket now than you expect to be later.

If you report annually, you file Form 8818 with your tax return each year and report the interest that accrued that year, even though you have not cashed the bond yet. You pay tax on money you have not received. This sounds backward, but it locks in your current tax rate and avoids a large tax bill in the year you finally redeem.

If you report at redemption, you report all the interest in the single year you cash the bond. That year's interest income will be higher, which might push you into a higher tax bracket. But you have had the use of the money tax-free for years. Most bondholders choose this method.

Once you pick a method for a series — say, Series EE — you are locked in for all Series EE bonds you own. You cannot report some annually and others at redemption. If you want to switch methods, you file Form 8818 with the IRS and the new method applies to all bonds of that series going forward.

The education interest exclusion

If you meet specific conditions, you may exclude some or all of the interest from federal tax. This is called the education savings bond interest exclusion, and it applies only to Series EE and Series I bonds issued after 1989.

To use the exclusion, you must have been at least 24 years old when you bought the bond. You must redeem the bond in the same year you pay may have access to education expenses — tuition, fees, books, and room and board at an accredited school. The expenses must be for you, your spouse, or a dependent. If the bond proceeds exceed the education costs, only the portion matching the costs is excluded.

The exclusion phases out at higher incomes. For 2024, the phase-out range for single filers starts at $84,100 and ends at $99,100 (these amounts change yearly). Married filing jointly starts at $133,900 and ends at $163,900. If your income falls in the phase-out range, you exclude a partial amount. Above the range, you exclude nothing.

You do not claim this exclusion on your tax return automatically. You report the interest normally, then subtract the excluded amount. Keep records of the bond purchase date, the year you redeemed it, and the education expenses you paid.

What happens if you redeem early

Savings bonds have a five-year holding period. If you redeem before five years, you lose the last three months of interest as a penalty. That lost interest is not taxable because you never received it, but it costs you money.

After five years, you can redeem without penalty, though you still owe tax on all the interest. The interest continues to accrue and compound for up to 30 years (Series EE) or 30 years (Series I), so holding longer means more interest and a larger tax bill in the year you redeem.

How to report the interest on your tax return

If you are reporting at redemption, you receive a Form 1099-INT from the financial institution where you redeemed the bond. This form shows the interest paid. You report this amount on Schedule B (Interest and Ordinary Dividends) and then on your Form 1040.

If you are reporting annually, you will not receive a 1099-INT each year because you have not redeemed the bond. Instead, you track the interest yourself using the bond's redemption value tables published by TreasuryDirect. You file Form 8818 with your tax return to report the accrued interest.

When you finally redeem an annually reported bond, the 1099-INT will show only the interest accrued in that final year (or zero if you reported everything already). Do not double-report the interest you already claimed in prior years.

Tax treatment for bonds held in different accounts

Savings bonds held in a regular taxable account are taxed as described above. If you hold bonds in a traditional IRA or other tax-deferred retirement account, the interest is not taxed until you withdraw from the account. If you hold bonds in a Roth IRA, the interest is never taxed federally, provided you follow Roth withdrawal rules.

However, most people buy savings bonds outside retirement accounts because bonds are already tax-advantaged (no state or local tax, and you control the timing of the federal tax). Putting them in a retirement account adds little benefit.

State and local tax treatment

This is the main tax advantage of savings bonds: interest is exempt from all state and local income taxes. If you live in a state with a high income tax rate, this exemption is worth real money over the life of the bond.

This exemption applies to all U.S. savings bonds, regardless of which series you own or which state you live in. You do not have to do anything to claim it — the exemption is automatic. When you file your state tax return, you straightforward do not report the savings bond interest.

Frequently Asked Questions

Do I owe tax if I give a savings bond to someone else?

The person who owns the bond when it is redeemed owes the tax on the interest. If you give a bond to your child and they redeem it, they owe the tax. If you redeem it before giving it away, you owe the tax. The tax follows the person who cashes it in.

What if I inherited a savings bond?

You owe tax on interest accrued after the original owner's death, not on interest that accrued before. The deceased owner's final tax return should report interest accrued up to the date of death. When you redeem the bond later, you report only the new interest earned in your name.

Can I avoid the tax by not redeeming the bond?

Yes, but only temporarily. As long as you hold the bond, you owe no federal tax (unless you chose annual reporting). Once you redeem it, the tax is due. The interest keeps accruing for up to 30 years, so you can delay the tax bill indefinitely by not cashing it, but eventually you will have to pay.

Is the interest taxable if I use it for education?

The interest is taxable unless you meet the education savings bond interest exclusion requirements: you must have been at least 24 when you bought the bond, you must redeem it the same year you pay education expenses, and your income must be below the phase-out threshold. straightforward using the money for education does not automatically exclude it.

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

You still owe tax on the interest accrued up to the date it was lost or destroyed. Contact TreasuryDirect to report the loss and request a replacement or payment. You will need the bond's serial number and issue date. The tax obligation does not disappear with the bond.