Yes, savings bond interest is taxable income, but the timing and method depend on the bond type

Interest earned on savings bonds counts as income to the federal government. You will owe federal income tax on it. However, you do not pay tax every year the bond sits in your drawer — instead, you report the interest when you cash the bond in, or in the year you choose to start reporting it annually. State and local governments do not tax savings bond interest, which is one advantage these bonds have over other savings vehicles.

The tax bill itself is not automatic. You report the interest on your federal tax return using Form 1040, and the amount you owe depends on your total income and tax bracket that year. If the interest pushes you into a higher bracket, you may owe more tax than if you had earned the same amount in a different year.

Key Takeaways

  • Series EE and Series I bonds are taxed only in the year you cash them in, unless you choose to report interest annually instead.
  • If you choose annual reporting, you must report the interest every single year, even if you do not cash the bond — switching back is difficult.
  • State and local taxes do not apply to savings bond interest, but federal income tax does.
  • You can avoid or delay the tax bill by holding the bond until a year when your income is lower, or by using bonds to pay for education expenses.

How the two main bond types handle interest taxation

Series EE bonds accrue interest each month but do not pay it out. Instead, the bond grows in value. When you cash it in, you receive the full amount — your original purchase price plus all the interest that accumulated. That entire interest amount becomes taxable in the year you cash the bond. You can also choose to report the interest each year as it accrues, even though you have not received the money yet. Once you make this choice, you must continue reporting annually for all your Series EE bonds, and switching back to the cash-in method is complicated.

Series I bonds work the same way: interest accrues monthly and compounds, and you report it all when you cash the bond. You have the same option to report interest annually if you prefer. The difference is that I bonds earn interest in two parts — a fixed rate set when you buy the bond, plus a variable rate that changes every six months. The total of both rates is what you report as taxable income.

Why the year you cash in matters for your tax bill

Savings bonds let you control when you recognize the income, which means you can time the tax hit. If you know you will have a lower income in a particular year — perhaps you are retiring, taking a sabbatical, or had a year with unusually high medical expenses — you can cash bonds that year and pay less tax on the interest than you would have in a higher-income year.

This strategy works because federal income tax is progressive: the more income you have, the higher your tax rate. If you earn $50,000 one year and $100,000 the next, cashing a bond with $5,000 in interest during the lower-income year means that interest is taxed at a lower rate. Over a lifetime of bond ownership, this timing can save you hundreds or thousands of dollars in taxes.

The trade-off is that you must actually cash the bond to realize this benefit. If you hold the bond and never cash it, you never pay the tax — but you also never access the money.

Using education bonds to reduce or eliminate the tax

If you use Series EE or Series I bond proceeds to pay for may have access to education expenses, you may be able to exclude some or all of the interest from your taxable income. may have access to expenses include tuition and fees at an accredited college, university, or vocational school, as well as contributions to a 529 plan or Coverdell Education Savings Account.

To claim this exclusion, you must meet several conditions: the bond must have been issued after 1989, you must have been at least 24 years old when you bought it, and you must use the proceeds in the same year you cash the bond. The exclusion also phases out if your income exceeds certain limits, which change each year. You report this on Form 8815 when you file your tax return.

This is one of the few ways to receive savings bond interest tax-free, but it requires planning ahead and meeting specific requirements.

Reporting interest on your tax return

When you cash a savings bond, the financial institution that redeems it does not automatically send you a 1099 form or report the interest to the IRS. This means you are responsible for calculating the interest and reporting it yourself. You can find the interest amount by checking the bond's redemption value against what you paid for it.

You report the interest on your Form 1040 as interest income. If you have other interest income from savings accounts, CDs, or other bonds, you add it all together on the same line. If your total interest income exceeds $1,500, you must also file Schedule B to itemize the sources.

Keeping records of when you bought each bond and what you paid for it is essential. If you ever face an audit, the IRS will want to see proof that you reported the correct amount.

What happens if you inherit savings bonds

If you inherit a savings bond, the interest that accumulated before the original owner's death is taxable to their estate, not to you. Any interest that accrues after you become the owner is your taxable income. The same rules apply: you can report it when you cash the bond, or you can choose to report it annually.

If the original owner had already chosen to report interest annually, that election carries forward to you. You will need to continue reporting annually unless you go through the process to revoke the election, which requires IRS approval.

Frequently Asked Questions

Do I have to pay taxes on savings bonds every year?

Not unless you choose to. Most people report the interest only when they cash the bond. However, you can elect to report interest annually as it accrues, even though you have not received the money. Once you make this choice, you must stick with it for all your Series EE and I bonds.

Can I avoid paying taxes on savings bond interest?

You cannot avoid federal income tax on the interest, but you can reduce it. Cashing bonds in a lower-income year lowers your tax rate. If you use the proceeds for may have access to education expenses, you may exclude some or all of the interest from income. State and local taxes never apply.

What if I cash a bond before it reaches face value?

You still owe tax on whatever interest has accrued, even if you cash the bond early and receive less than you paid for it. The interest is the difference between what you paid and what you received, and that difference is taxable income.

Does my spouse's income affect the tax on my savings bonds?

If you file jointly, your combined household income determines your tax bracket. Cashing a bond adds to your joint income, which may push you into a higher bracket. Filing status matters for the education bond exclusion too — the income limits are different for married couples filing jointly versus single filers.

Who reports the interest if I own a bond in a child's name?

The person whose Social Security number is on the bond reports the interest on their tax return. If the bond is in your child's name, your child reports it, even if you bought it and hold it. This can affect whether your child owes taxes or whether the interest is taxable to you under "kiddie tax" rules if your child is under 24.