How government bonds are taxed | Vanguard (2024)

FAQs

How government bonds are taxed | Vanguard? ›

Taxability. The interest income on Treasury securities

Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes. Municipal bond income is also usually free from state tax in the state where the bond was issued.

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.

The interest income on agency bonds generally is subject to federal and state taxes. Interest on certain agency bonds, including securities issued by the FHLB and FFCB, is exempt from state taxes. Agency bonds, when bought at a discount, may subject investors to capital gains taxes when they are sold or redeemed.

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).

Timing the Sale of Treasury Bonds

If you sell a bond for more than its purchase price before it matures, you may incur capital gains taxes. Long-term capital gains, on assets held for more than a year, are taxed at a lower rate than short-term gains.

You can take the tax exclusion if you meet all of these conditions: You were 24 years old or older before the bonds were issued. Your modified adjusted gross income is less than the cut-off amount that the IRS sets for the year in which you want to take the exclusion. The cut-off amount may change each year.

Interest from Treasuries is generally taxable at the federal level, but not at the state level. Interest from munis is generally exempt from federal taxes, and if you live in the state where the bond was issued, the interest may also be exempt from state taxes.

Municipal bonds are free from federal taxes and are often free from state taxes. If the bond purchased is from a state other than the purchaser's state of residence, the home state may levy a tax on the bond's interest income.

Are government bonds tax efficient? ›

Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they're exempt from state and local income taxes. 89 But corporate bonds don't have any tax-free provisions, and, as such, are better off in tax-advantaged accounts.

The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.

In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer's qualification for certain other tax breaks. The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.

Like other investments, the tax owed on bonds and bond funds can be deferred by holding them in a tax-advantaged retirement account, such as a 401(k) or IRA. With that strategy, you won't owe any tax until you withdraw money at retirement, at which point you'll owe ordinary income tax on any distribution.

Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax, but is exempt from all state and local income taxes.

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.

Is interest income from I bonds taxed as capital gains? No, the interest income earned from I bonds is not considered a capital gain and is therefore taxed differently. Instead, it is taxed as regular income at the federal level and exempt from state and local taxes.

For bonds with very small discounts: If the discount is less than 0.25% of the bond's face value times the number of years to maturity, the discount is taxed as a capital gain in the year the bond matures.

We put a 1099 into your TreasuryDirect account if: You cash a savings bond in TreasuryDirect. (We don't provide a 1099 if you only buy or hold a savings bond.) You hold a marketable security in TreasuryDirect and the security earns interest.

While Treasurys boast higher rates than CDs, you can still score a generous annual percentage yield (APY) on a CD by shopping around. Typically, online banks offer higher interest rates than brick-and-mortar ones. Some of the best CDs have APYs that top 5%.