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

The interest your savings bonds earn counts as ordinary income for federal tax purposes. You owe tax on it — there is no way around that. What you can control is when you report it: either each year as the interest accrues, or all at once when you cash the bond in. State and local taxes do not apply to savings bond interest, which is one real advantage over other savings vehicles.

The timing choice matters because it affects which tax year the income lands in and how much you owe at once. Most people defer reporting until they redeem the bond, which means a larger tax bill in that year but no annual paperwork in the years before.

Key Takeaways

  • Savings bond interest is subject to federal income tax but exempt from state and local taxes.
  • You can report interest each year it accrues or wait and report all of it when you redeem the bond.
  • If you choose to report annually, you must do so consistently for that bond — you cannot switch strategies mid-stream.
  • Series EE and Series I bonds held in a minor's name may allow you to defer taxes until the child reaches age 18 or the bond matures.
  • Redeeming a bond in a year when your income is lower can reduce your overall tax burden.

The two ways to report savings bond interest

When you file your federal tax return, you report interest income on Form 1040, Schedule 1. You have two reporting methods, and the choice depends on your situation and preference.

Method one: Report interest when you redeem the bond. You wait until you cash in the bond, then report all the accumulated interest in that tax year. This is the simpler path for most people because you file one report instead of many. The downside is that a large lump of interest in a single year can push you into a higher tax bracket or affect other tax calculations (like Medicare premiums or education credits) that depend on your income level.

Method two: Report interest each year as it accrues. You report the interest annually on your tax return, even though you have not cashed the bond yet. This spreads the tax burden across multiple years and may keep you in a lower bracket. The catch is that you must use this method consistently for that specific bond — once you start reporting annually, you cannot switch to deferring until redemption. You also have to calculate the accrued interest yourself each year, which requires tracking the bond's value.

How to calculate interest if you report annually

If you choose to report interest each year, you need to know how much your bond has earned. The Treasury publishes redemption values for all savings bonds on its website at treasurydirect.gov. You can look up your bond by series, denomination, and serial number to find its current value, then subtract what you paid for it to get the year's interest.

For Series EE bonds, you can also use the Treasury's savings bond calculator, which shows the value of your bond on any given date. For Series I bonds, the interest rate changes every six months (in May and November), so the calculator helps you see exactly how much interest accrued in each period.

Keep records of these calculations for your tax file. If the IRS questions your reported interest, you will need to show how you arrived at the number.

Series EE and Series I bonds: Different interest structures, same tax rule

Series EE bonds earn interest through a combination of a fixed rate and market-based adjustments. Series I bonds earn a composite rate made up of a fixed portion plus an inflation adjustment that resets twice a year. Despite the different earning methods, the tax treatment is identical: all interest is taxable federal income, and you choose whether to report it annually or at redemption.

The interest rate difference does affect how much tax you will owe, but not whether you owe it. A Series I bond earning 5% interest is still fully taxable, just as a Series EE bond earning 2% is.

Bonds held in a child's name: The kiddie tax rule

If you buy a savings bond in your minor child's name, you may be able to defer reporting the interest until the child turns 18 or the bond reaches final maturity. This is sometimes called the "kiddie tax" election, though the formal name is electing to defer interest under Section 454 of the Internal Revenue Code.

The advantage is that you avoid reporting large interest amounts while the child is young and in a low tax bracket. When the child turns 18, the interest becomes taxable to them, usually at a lower rate than it would be to you. You must make this election on your tax return in the year you buy the bond — you cannot add it later.

This strategy works best if you plan to hold the bond until the child is older or if the child will have little other income when the bond matures. Talk to a tax professional if you are considering this route, because the rules interact with other tax benefits and the child's own filing requirements.

What happens when you redeem a bond

When you cash in a savings bond, the Treasury does not withhold taxes automatically. You receive the full redemption value, and it is your responsibility to report the interest on your tax return. This is different from a bank savings account, where the bank sends you a 1099-INT form and may withhold taxes if you request it.

You will not receive a form from the Treasury reporting the interest. You calculate it yourself by subtracting your purchase price from the redemption value. Keep the redemption receipt and your purchase records so you can document the interest amount if needed.

If you have been reporting interest annually, your final tax return for that bond simply reports the remaining interest accrued since your last return. If you deferred reporting until redemption, you report all accumulated interest in the year you redeem it.

Strategies for managing the tax hit

Because you control when you redeem a bond, you can time the redemption to minimize taxes. If you expect a lower-income year — perhaps you are retiring or taking a sabbatical — redeeming bonds that year spreads the interest income across a lower tax bracket. Conversely, if you have a high-income year, you might hold off redeeming bonds to avoid pushing yourself into a higher bracket.

This strategy works best if you have multiple bonds maturing at different times and flexibility in when you need the cash. If you must redeem a bond for immediate expenses, you do not have this luxury, but it is worth considering if you are planning ahead.

Another approach is to redeem bonds gradually over several years rather than all at once. This spreads the interest income and keeps each year's tax bill smaller. The downside is that you lose the compounding benefit of leaving money in the bond longer, so this only makes sense if the tax savings outweigh the lost interest.

Frequently Asked Questions

Do I have to pay state or local income tax on savings bond interest?

No. Savings bond interest is exempt from state and local income taxes. This is one of the few tax breaks built into savings bonds. You still owe federal income tax, but the state and local exemption makes bonds slightly more attractive than bank savings accounts or CDs in high-tax states.

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

You can still report the interest and pay tax on it. Contact the Treasury to report the loss and request a replacement or payment. You will need to provide proof of purchase if possible. The interest you earned up to the date of loss is still taxable income in the year you report it, even though you did not receive the cash.

Can I avoid taxes by giving a savings bond to someone else?

No. The person who owns the bond when it is redeemed reports the interest, regardless of who bought it or who held it before. If you give a bond to a family member, they will owe tax on the interest accrued after they take ownership. Interest earned before the transfer is your tax responsibility.

Do I need to report savings bond interest if my total income is very low?

If your total income falls below the standard deduction for your filing status, you may not be required to file a tax return at all. However, if you have other income that pushes you above the threshold, you must report the savings bond interest. Check the IRS website for current standard deduction amounts based on your age and filing status.

What if I redeem a bond before it reaches final maturity?

You still owe tax on all interest earned up to the redemption date, even if you cash it in early. Early redemption does not change the tax treatment — only the amount of interest you have earned by that point. Series EE bonds have a minimum holding period of one year, and you lose the last three months of interest if you redeem before five years, but the interest you do receive is fully taxable.