Yes, savings bonds are taxable, but the tax timing and rules depend on which type you own

Both Series EE and Series I savings bonds are subject to federal income tax on the interest they earn. You do not pay tax on the bond itself — only on the earnings. The key difference from other investments is that you can choose when to pay that tax: either each year as interest accrues, or all at once when you cash the bond or it reaches final maturity. Most people defer the tax until they redeem the bond, which is the default unless you elect otherwise.

State and local taxes do not apply to savings bond interest. This is one real advantage over taxable savings accounts or CDs, which are subject to state income tax in most places. However, federal tax is unavoidable unless the bond qualifies for an education exclusion — a specific circumstance covered below.

Key Takeaways

  • Federal income tax applies to all savings bond interest, but you can defer paying it until you redeem the bond rather than reporting it annually.
  • State and local income taxes do not apply to savings bond interest, which saves money compared to bank savings accounts in high-tax states.
  • 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 taxation under the education bond program.
  • When you redeem a bond, you receive a Form 1099-INT showing the total interest earned, which you must report on your tax return.
  • If you hold a bond until it reaches final maturity without redeeming it, you still owe tax on all accumulated interest in the year it matures.

How the tax deferral works and when you must report it

When you buy a savings bond, you are not required to report the interest on your tax return each year. Instead, the interest compounds inside the bond without triggering an annual tax bill. This is called tax deferral, and it is the standard treatment unless you make a specific election with the IRS.

The tax becomes due in the year you redeem the bond. At that point, the financial institution that processes the redemption issues you a Form 1099-INT showing the total interest earned over the life of the bond. You report this amount on your federal tax return for that year, and you pay income tax on it at your ordinary tax rate — the same rate that applies to your wages or salary.

If you hold the bond until it reaches final maturity without cashing it, the tax is still due. The bond stops earning interest at maturity, and you owe tax on all accumulated interest in the year maturity occurs, even if you do not redeem it immediately.

The education bond exclusion: when interest may not be taxable

If you use the proceeds from a savings bond to pay for may have access to education expenses, you may be able to exclude some or all of the interest from federal taxation. This is called the education bond exclusion, and it applies to both Series EE and Series I bonds purchased after 1989.

To may have access to, you must meet several conditions: you must be at least 24 years old when you purchase the bond, the bond must be registered in your name (not your child's), and you must use the redemption proceeds in the same calendar year for tuition, fees, or room and board at an accredited school. Books, supplies, and student loan repayment do not count. The exclusion phases out at higher income levels, so high earners may not benefit from it at all.

You do not claim this exclusion automatically. You must file Form 8815 with your tax return in the year you redeem the bond. If you do not file the form, you pay tax on the interest even if you used the money for education.

Series I bonds and inflation-adjusted interest

Series I bonds earn interest in two parts: a fixed rate set when you buy the bond, and a variable rate that adjusts every six months based on inflation. Both portions are taxable, and the tax treatment is the same as with Series EE bonds — you can defer reporting until redemption, or elect to report annually.

The variable portion can make Series I bonds more valuable in high-inflation periods, but it does not change how or when you pay tax. You still report the total interest earned (fixed plus variable) on your Form 1099-INT when you redeem.

What happens if you elect to report interest annually

You can choose to report savings bond interest on your tax return each year instead of deferring it until redemption. This election is made using Form 3115, and once you make it for a particular bond, it applies for the life of that bond. You cannot switch back to deferral later.

Most people do not make this election because deferral is simpler and delays the tax bill. However, annual reporting can make sense if you are in a very low tax bracket in the years you hold the bond and expect to be in a higher bracket when you redeem it. It can also help if you have investment losses that offset the bond interest.

If you do elect annual reporting, you must estimate the interest earned each year even though you have not redeemed the bond yet. This requires calculating the bond's value based on Treasury tables, which is more work than simply waiting until redemption.

Reporting the redemption on your tax return

When you cash a savings bond, the financial institution sends you a Form 1099-INT in January of the following year. This form shows the total interest earned from the purchase date through the redemption date. You report this amount on Schedule B (Interest and Ordinary Dividends) of your Form 1040, or on the appropriate line of your tax return if you use a simpler form.

If you redeemed multiple bonds, you may receive multiple 1099-INT forms. Add up all the interest from all forms and report the total. If you lost a 1099-INT or did not receive one, contact the institution where you redeemed the bond and request a duplicate.

The interest is taxed as ordinary income, meaning it is added to your wages and other income and taxed at your marginal rate. It does not receive preferential treatment like long-term capital gains.

Bonds held in custodial or trust accounts

If a parent or guardian purchases a savings bond in a child's name, the interest is still taxable to the child. However, if the child's total income is below the standard deduction for that year, no tax is due even though the interest is earned. This can make savings bonds an attractive way to save for a child's future without triggering a tax bill in low-income years.

If a bond is held in a trust or estate, the interest is taxable to the trust or estate, not to the beneficiary. The trustee or executor reports the interest on the trust's tax return (Form 1041) unless the trust distributes the proceeds to a beneficiary, in which case the beneficiary reports it.

Frequently Asked Questions

Do I have to report savings bond interest every year, or can I wait until I cash it?

You can wait until you redeem the bond. Tax deferral is the default, so you do not report anything until you cash it and receive a Form 1099-INT. You only report annually if you file Form 3115 to elect that treatment, which most people do not do.

What if I inherit a savings bond from someone else?

You inherit the bond with all its accrued interest. When you redeem it, you owe tax only on the interest earned after the original owner's death. The interest earned before death was the responsibility of the deceased person's estate. The redemption statement will show you the split.

Can I avoid paying tax on savings bond interest?

No, except through the education bond exclusion if you meet all the requirements. Federal income tax applies to all savings bond interest. However, you do avoid state and local tax, which is a real benefit in high-tax states.

If I cash a bond in December but do not receive the 1099-INT until January, which year do I report the interest?

You report it in the year you redeemed the bond, not the year you receive the form. If you cashed it in December, you report the interest on your December tax return, even if the 1099-INT arrives in January. You do not wait for the form to file.

What is the tax rate on savings bond interest?

Savings bond interest is taxed at your ordinary income tax rate, which depends on your total income and filing status. It is not a flat rate. The interest is added to your other income, and you pay federal tax at whatever bracket that total income puts you in.