Yes, savings bond interest is taxable income, but the timing and method depend on which bond you own

Interest earned on U.S. savings bonds counts as taxable income to the federal government. You owe tax on it, but you have choices about when to pay it — either each year as interest accrues, or all at once when you cash the bond. State and local governments do not tax savings bond interest, which is one reason these bonds appeal to savers.

The tax treatment differs slightly between Series EE bonds and Series I bonds, and the rules change if you use the money for education. Understanding which path you are on matters because it affects how much you owe and when you owe it.

Key Takeaways

  • Federal income tax applies to all savings bond interest, but you can defer paying it until you redeem the bond or it reaches final maturity.
  • Series EE and Series I bonds are taxed the same way federally, though I bonds earn interest differently based on inflation rates.
  • If you use bond proceeds for may have access to education expenses, you may exclude some or all interest from taxable income under the Education Savings Bond Program.
  • State and local taxes do not apply to savings bond interest, giving you a small tax advantage compared to other savings accounts.
  • You report interest on your federal tax return the year you redeem the bond, unless you chose to report it annually.

How federal tax works on savings bond interest

The IRS taxes savings bond interest as ordinary income at your regular tax rate. If you are in the 22% federal tax bracket, you pay 22% of your interest earnings to the IRS. The interest is not taxed at a capital gains rate or any preferential rate — it is treated the same as wages or other income.

You have two ways to handle the tax bill. The first is to report interest each year on your tax return as it accrues, even though you have not cashed the bond yet. The second is to wait and report all the interest in the year you actually redeem the bond. Most people choose the second method because it delays the tax bill, but the IRS allows either approach. Whichever method you pick, you must stick with it for that bond.

If you own a bond jointly with someone else, both owners are responsible for reporting the interest unless you specify otherwise on the bond registration. This matters if you are buying a bond for a child or with a spouse — clarify who will report the interest before you purchase.

The education savings bond interest exclusion

The Education Savings Bond Program lets you exclude some or all of your savings bond interest from taxable income if you use the money to pay for may have access to education expenses. may have access to expenses include tuition and fees at an accredited college, university, or vocational school, plus room and board if the student is enrolled at least half-time. The exclusion does not cover books, supplies, or student loan repayment.

To use this exclusion, you must have been at least 24 years old when you bought the bond. The bond must be registered in your name alone or jointly with your spouse — not in your child's name. You must redeem the bond the same year you pay the education expenses, or within the same tax year. If you redeem the bond but do not spend all the proceeds on education that year, you can only exclude the interest that corresponds to the education expenses you actually paid.

The exclusion phases out if your income exceeds certain thresholds, which change each year. The IRS publishes the current limits on its website each January. If your income is too high, you lose the exclusion entirely — there is no partial benefit.

Series EE bonds and Series I bonds taxed the same way

Both Series EE and Series I bonds follow the same federal tax rules. The difference between them is how they earn interest, not how that interest is taxed. Series EE bonds earn a fixed rate set by the Treasury when you buy them. Series I bonds earn a combined rate made up of a fixed portion plus an inflation adjustment that changes every six months.

Regardless of which type you own, you report the total interest earned in the year you redeem the bond (or annually if you chose that method). The IRS does not care whether the interest came from a fixed rate or an inflation adjustment — it is all taxable income either way.

If you own older bonds from before 2005, the rules are the same. The Treasury stopped issuing paper bonds in 2011, but all bonds issued since then follow the current tax treatment.

What happens if you inherit a savings bond

If you inherit a savings bond, you become responsible for the tax on any interest earned after you take ownership. Interest that accrued before the original owner died is the responsibility of their estate, not you. This matters because it affects how much you owe in the year you redeem the bond.

You can choose to report the inherited bond's interest annually or defer it until redemption, just like any other bond you own. If the bond was registered in the deceased owner's name alone, you will need to have it reissued in your name before you can redeem it. The Treasury can walk you through that process, and reissuing does not trigger a tax event.

State and local tax treatment

U.S. savings bonds are exempt from state and local income tax. This is a federal law that applies everywhere, regardless of where you live or where you redeem the bond. If you live in a state with high income tax, this exemption is a real advantage compared to keeping money in a regular savings account or money market fund, which would be subject to state tax.

The exemption applies only to the interest. If you somehow had a capital gain or loss on the bond (which is rare with savings bonds), that would follow different rules. But for the interest itself, state and local taxes simply do not apply.

Reporting savings bond interest on your tax return

When you redeem a bond, the Treasury sends you a Form 1099-INT showing the interest earned. You report this amount on your federal tax return, usually on Schedule B if you have other interest income. If you chose to report interest annually instead of deferring it, you still get a 1099-INT each year, and you report it the same way.

Keep your bond redemption records and the 1099-INT forms together. If you redeem multiple bonds in the same year, you will receive multiple 1099-INT forms, and you add all the interest together on your return. If the Treasury made an error on the form, contact them to request a corrected version before you file.

If you lost a bond or it was destroyed, you can still claim the interest on your tax return. You will need to file a claim with the Treasury to get a replacement or payment, and they will issue a 1099-INT once the claim is processed.

Frequently Asked Questions

Do I have to pay taxes on savings bond interest every year?

No. You can defer reporting the interest until you redeem the bond, which is what most people do. You only pay tax once, in the year you cash it in. However, you can choose to report interest annually if you prefer — you just have to pick one method and stick with it for that bond.

What if I cash in a bond before it matures?

You still owe tax on all the interest it earned up to that point. The tax treatment does not change based on when you redeem it. You report the interest in the year you redeem it (or annually if you chose that method), regardless of whether the bond has reached its final maturity date.

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

No. Whoever owns the bond when it is redeemed owes the tax on the interest. If you give a bond to your child, they owe tax on the interest in the year they cash it. If you register a bond in your child's name from the start, they owe tax on it. Transferring ownership does not erase the tax obligation.

How do I know if I may have access to for the education savings bond interest exclusion?

You must have been at least 24 when you bought the bond, the bond must be in your name alone or jointly with your spouse, and you must use the proceeds for may have access to tuition and fees in the same tax year you redeem it. Income limits apply and change each year. Check the IRS website for the current thresholds for your filing status.

Are savings bonds taxed differently than other investments?

Savings bond interest is taxed as ordinary income, not at capital gains rates. This makes them less tax-efficient than stocks held long-term, but they are exempt from state and local tax, which other investments are not. The trade-off depends on your state's tax rate and how long you hold the bond.