Savings bonds are often purchased by investors as a safe, reliable investment or given as gifts. Regardless of how a savings bond is received initially, owners of savings bonds should be aware of how the bonds are taxed when cashed.
What is a Savings Bond?
A savings bond is a government bond issued by the U.S. treasury. U.S. savings bonds are often considered some of the safest investments purchasable because they are backed by the U.S. government.There are two common types of savings bonds, Series EE and Series I bonds. While they are very similar, there are some distinctions to pay attention to.
Each year, an investor may invest from a minimum of $25 in U.S. electronic Series I and Series EE savings bonds or $50 in Series I paper savings bonds up to a maximum of $10,000 in electronic savings bonds or $5,000 in paper savings bonds. While in the past bonds were sold in paper form, today a majority are sold electronically through the treasury’s website.
Savings bonds are purchased at their face value and earn interest. Series EE bonds earn a fixed rate of interest, where Series I earn a rate that is adjusted for inflation twice a year. If a Series EE bond is held for at least a 20-year term, the savings bond will be worth at least twice what it was purchased for (e.g., a $100 bond purchased today can be redeemed at maturity for $200). Bonds must be held for at least one year but can be held for up to 30 years depending on the specific terms of the savings bond.
Are Savings Bonds Subject to Tax?
Savings bonds are not subject to state and local taxes. Savings bonds used for certain qualified education expenses are eligible for tax benefits and may be used as a tax saving tool for education expenses. Taxpayers with qualified expense tax benefits may not have to pay taxes on interest if certain types of savings bonds (i.e., Series EE and Series I savings bonds) are used to pay for the qualified education expenses. Qualified education expenses include:
- Tuition;
- Fees such as student activity fees;
- Books (subject to exceptions);
- Equipment like safety glasses or goggles for the laboratory (subject to exceptions);
- Etc.
The interest paid on savings bonds when they are redeemed is subject to federal taxation. However, there are several options for when to report the interest on savings bonds.
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How Are Savings Bonds Taxed?
People who have invested in savings bonds can report the interest earned from savings bonds in two ways:
- Investors may elect to defer reporting interest income on their savings bonds until the bond is redeemed or fully matured, whichever happens first.
- Investors can report the interest and pay the tax due on it each year.
Are Savings Bonds Subject to Any Penalties for Early Termination?
If an investor redeems a savings bond prior to its maturity date, it may be subject to early redemption penalties. Investors should thoroughly review the terms of their specific bond to avoid any penalties.
Generally, savings bonds are subject to an early redemption penalty if they are redeemed before five years have passed. If the investor terminates their bond(s) before five years have passed, they forfeit the prior three months of interest. Generally, after five years, no penalty applies and the savings bond can be redeemed at any time.
Who Pays Taxes on a Gifted Savings Bond?
Often, savings bonds are received or given as a gift. They are still taxable. The interest income of the savings bond will be taxed to the bond’s owner—i.e., the recipient of the gift—when the bond matures and is redeemed for cash (or the owner will be taxed each year if they elect to report the interest income annually).
Conclusion
Savings bonds can be an excellent way to safely invest funds for the future while making a noticeable return on your investment or utilized to pay for education expenses tax-free.
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FAQs
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.
How do I avoid taxes when cashing in savings bonds? ›
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.
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.
How are EE bonds taxed when redeemed? ›
Key Takeaways. Interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. The interest that savings bonds earn is the amount that a bond can be redeemed for above its face value or original purchase price.
Will I get a 1099 for cashing in savings bonds? ›
If you cash a paper savings bond at a local bank, that bank is responsible for giving you a 1099. 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.)
Does cashing savings bonds count as income? ›
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.
How much is a $100 savings 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 |
May 7, 2024
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.
Do I need to report I bonds on my tax return? ›
Yes, you are required to pay federal income taxes on the interest earned by inherited series I savings bonds. The interest is taxed in the year it is earned and must be reported on the beneficiary's tax return.
Should I cash in my EE savings bonds? ›
Most bonds can be cashed in after one year, but you will lose three months' worth of interest if you cash them in before five years.
Through TreasuryDirect
- Download and complete FS Form 1522.
- Have your signature certified if the value of the bonds you are cashing is more than $1,000. See FS Form 1522 for more about this requirement.
- Mail the completed form and your bonds to the address listed on FS Form 1522.
Capital gains, which are any profit you make from selling a bond before maturity. (Capital losses are also possible.) The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate.
What happens when you redeem bonds? ›
It's possible to redeem a savings bond as soon as one year after it's purchased, but it's usually wise to wait at least five years so you don't lose the last three months of interest when you cash it in. For example, if you redeem a bond after 24 months, you'll only receive 21 months of interest.
How can I avoid paying taxes on savings 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 do I file taxes on cashed savings bonds? ›
When you redeem it, you'll receive a Form 1099-INT that shows the full amount of interest the bond earned. You can report the interest earned every year. If you do, you can subtract the interest you paid tax on in prior years from your taxable income.
What bonds are federally tax exempt? ›
Municipal Bonds
Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes.
What is the best way to cash in savings bonds? ›
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.
Is there a fee for cashing in savings bonds? ›
Anyone who's 18 or older with a valid Social Security number, U.S. bank account, and U.S. address can purchase savings bonds. They're available to be cashed in after a single year, though there's a penalty for cashing them in within the first five years.
