Federal income tax applies when you cash in your savings bond

When you redeem a US savings bond, the interest you earned is subject to federal income tax. You do not pay tax on the original amount you invested—only on the earnings. The year you cash in the bond is the year you owe tax on all the interest it accumulated, even if you held it for decades.

The IRS treats savings bond interest as ordinary income, which means it is taxed at your regular income tax rate, not at a lower capital gains rate. If you are in the 22% tax bracket, you pay 22% on the interest. If you are in the 12% bracket, you pay 12%. The rate depends on your total income for that year, not on the bond itself.

You report the interest on your federal tax return in the year you redeem the bond. The Treasury does not send you a 1099 form automatically—you calculate the interest yourself by subtracting what you paid for the bond from what you received when you cashed it in.

Key Takeaways

  • Federal income tax applies to the interest your savings bond earned, calculated at your regular tax rate in the year you redeem the bond.
  • State and local income taxes do not apply to savings bond interest, which is one tax advantage of these bonds.
  • You can choose to report interest each year as it accrues, or wait and report it all in the year you cash in the bond—whichever you choose applies to all your savings bonds.
  • Series EE and Series I bonds can avoid federal tax entirely if you use the money for may have access to education expenses and meet income limits.

State and local taxes do not apply to savings bond interest

This is the main tax advantage of US savings bonds. While federal income tax applies, state income tax and local income tax do not. If you live in a state with a high income tax rate, this can save you a meaningful amount.

For example, if you earned $5,000 in interest on a savings bond and live in California, you would owe federal income tax on that $5,000, but California state income tax would not apply. The same is true in New York, Massachusetts, and every other state. This tax exemption is automatic—you do not need to do anything to claim it.

You can report interest yearly or all at once when you cash in

The IRS gives you a choice about when to report savings bond interest. You can either report the interest each year as it accrues (even though you have not received the money yet), or you can wait and report all of it in the year you redeem the bond.

Most people choose to wait and report it all at the end, because they do not receive the money until they cash in the bond. However, if you have a bond that will mature in a year when your income is unusually low, you might benefit from reporting interest early in years when your income is higher, to spread the tax burden across multiple years.

The important rule is that whichever method you choose applies to all your savings bonds. You cannot report interest yearly on one bond and wait until redemption on another. Once you pick a method, you are locked into it for all your bonds unless you get permission from the IRS to change.

Education bonds can avoid federal tax under specific conditions

Series EE bonds and Series I bonds issued after 1989 can be redeemed tax-free if you use the money for may have access to education expenses. The expenses must be for tuition and fees at an accredited college, university, or vocational school, or for contributions to a 529 education savings plan.

To claim this exemption, you must meet income limits. For 2024, the income phase-out begins at $81,100 for single filers and $128,650 for married couples filing jointly (these numbers change each year). If your income exceeds the upper limit, you cannot use this exemption at all. If your income falls within the phase-out range, you can claim a partial exemption.

The bond must have been issued in the name of the bond owner who is at least 24 years old at the time of issue. You cannot use this exemption for bonds issued for a child, even if you use the money for their education. You also must redeem the bond in the same year you pay the education expenses—you cannot cash it in one year and use the money the next year.

You report the interest amount yourself on your tax return

The Treasury does not automatically report savings bond interest to the IRS or send you a 1099-INT form. You are responsible for calculating the interest and reporting it yourself on your federal tax return.

To find the interest amount, subtract the purchase price from the redemption value. If you bought a Series EE bond for $50 and cashed it in for $107, your interest is $57. You report this $57 on Schedule B (Interest and Ordinary Dividends) of your Form 1040, or on the main form itself if you use the simplified method.

If you have lost track of what you paid for a bond, you can contact the Treasury at TreasuryDirect.gov or call 1-844-284-2676 to look up your purchase price. Keep records of all your bonds and their purchase dates, because you will need this information when you file your taxes.

Inherited savings bonds have different tax rules

If you inherit a savings bond, the interest that accumulated before the original owner's death is not taxed to you. The estate of the person who owned the bond pays tax on that interest (or it is exempt from estate tax under certain conditions).

Any interest that accumulates after you inherit the bond is taxed to you in the year you redeem it, using the same rules as any other bond you own. If you choose to report interest yearly, that election applies to your inherited bonds as well.

Frequently Asked Questions

Do I have to pay federal income tax on savings bond interest?

Yes. Federal income tax applies to all interest earned on US savings bonds, calculated at your regular tax rate in the year you redeem the bond. The only exception is if you use Series EE or Series I bonds for may have access to education expenses and meet the income limits.

What if I cash in a savings bond in a year when my income is very high?

You will owe federal income tax on the bond interest at whatever your tax rate is that year. If you knew in advance that a particular year would be high-income, you could have reported the interest yearly in prior years to spread the tax across multiple years—but you cannot change this retroactively.

Do I need to report savings bond interest if I earned less than the standard deduction?

If your total income is below the standard deduction for your filing status, you generally do not need to file a tax return. However, if you have other income sources or are claimed as a dependent, the rules are different. Consult a tax professional or the IRS website for your specific situation.

Can I avoid paying tax by not cashing in my savings bond?

Yes, as long as you hold the bond. Tax is only due in the year you redeem it. However, Series EE bonds stop earning interest after 30 years, and Series I bonds stop after 30 years as well, so holding them indefinitely does not help you avoid tax forever.

What happens if I cash in a bond and do not report the interest?

The IRS may assess penalties and interest on the unpaid tax if they discover the unreported income. It is better to report the interest, even if you cannot pay the full tax amount immediately—you can set up a payment plan with the IRS.