Douglas Olsen
Interest accrued on savings bonds is usually taxable, and the interest earned on your savings bonds is considered part of your gross income for tax purposes. However, there are certain conditions under which you can avoid paying taxes on the interest. For example, if you cash in qualifying savings bonds in the same tax year and pay for qualified higher education expenses at an eligible institution, you may be able to exclude the interest from your gross income. This exclusion applies to Series I and EE bonds issued after 1989 and registered to someone 24 years or older. Additionally, if your total interest for the year is less than $1500, you may not need to report it on Schedule B of your tax return.
| Characteristics | Values |
|---|---|
| Interest on savings bonds | Variable rate that adjusts to the level of inflation every six months |
| Interest earned | Available to view in TreasuryDirect account or calculated using the Savings Bond Calculator |
| Interest and taxes | Interest becomes part of gross income for tax purposes; taxes can be avoided if the interest is used to pay for higher education |
| Tax exclusion criteria | Cashing bonds in the same tax year for which exclusion is claimed; paying qualified higher education expenses to an eligible institution in the same tax year; filing tax return with any status except married filing separately |
| Interest reporting | Form 1099-INT received when bond is cashed or matures, or at the end of the year |
| Bond maturity | 20 years |
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What You'll Learn
Interest on savings bonds and tax
The interest accrued on savings bonds is taxable. This interest income is reported on a 1099-INT, which is available in your TreasuryDirect account by January 31 of the following year. The 1099-INT will only be issued when the bond is cashed or matures, and it will show all the interest accrued over the years. The interest income is then included in the owner's yearly tax return.
If you receive a 1099-INT as the new owner of a bond, you must prove to the IRS that a portion of the interest was reported by a previous owner. You can do this by following the instructions in IRS Publication 550. You can also use IRS Form 3115 to defer the interest.
The person who owes taxes on the interest is the owner of the bond. If a child is the sole owner, a parent may report the interest and pay the taxes on their tax return. If a bond is co-owned, the purchaser is responsible for the taxes. If two people split the purchase price, each person is responsible for the proportion of taxes that represent their ownership stake.
Interest accrued on EE and I bonds is taxable for federal income tax purposes, but it is exempt from state and local taxes. You can avoid paying federal income tax on the interest by using the money for qualified higher education expenses. This tax exclusion has an income limit, and the money must be used in the same tax year for which you are claiming the exclusion.
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Interest on savings bonds for higher education
Interest accrued on savings bonds is typically considered taxable income. However, under certain conditions, you can avoid paying taxes on the interest accrued on savings bonds by using it to pay for higher education expenses. This is known as the "tax exclusion" or "tax advantage".
To qualify for the tax exclusion, the savings bonds must be Series EE or I bonds issued after 1989. They must be registered with you as the owner, and you must have been 24 years or older when the bond was issued. If you are married, the bond may be registered with you and your spouse as owners. You must also cash the qualifying savings bonds in the same tax year for which you are claiming the exclusion and pay qualified higher education expenses to an eligible institution in the same tax year. The expenses must be for yourself, your spouse, or someone you list as a dependent on your federal income tax return, and you must file your IRS tax return with any status except "married filing separately".
The interest on Series I bonds is calculated using a fixed interest rate and a variable rate that adjusts to the level of inflation every six months. The variable rate adjusts higher or lower as inflation rises or falls, protecting the purchasing power of your money. Series I bonds are currently yielding a lower rate than they did during the record-high inflation of April to October 2022, and a continued decline in yields is expected as inflation targets are met.
To determine the interest accrued on your savings bonds, you can refer to Form 1099-INT, which will be provided by the financial institution that issued the bond or through your TreasuryDirect account. This form details the interest earned by the bond for the year and must be included in your federal income tax return.
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Interest on savings bonds for college expenses
Savings bonds are a safe and low-risk method of saving for college. Series EE and Series I savings bonds are available from the US Treasury Department and offer a modest return on investment. These bonds are a good option for college savings as the interest earned is generally free of federal, state, and local taxes as long as the bonds are used to pay for qualified college expenses.
To be eligible for the tax exclusion, the savings bonds must be used to pay for qualified educational expenses for oneself, a spouse, or a dependent child. These expenses include tuition and fees for courses that count toward a degree or certificate program, as well as student activity fees and related expenses required for enrollment at an eligible institution. The expenses must occur in the same tax year in which the bonds are redeemed, and the qualified education expenses must not have been covered by other means, such as financial aid or scholarships. Additionally, the bondholder must not be married filing separately.
It is important to note that there are age restrictions on savings bonds. The owner of the bond must be 24 years or older when the bond is issued, and parents should purchase bonds in their own names rather than in their child's name. There are also income limits for bond buyers. Furthermore, Series I bonds cannot be cashed in for the first 12 months of ownership, and if cashed in before five years, the owner will lose the last three months' worth of interest.
Overall, savings bonds can be a good option for those looking to save for college expenses, but it is important to carefully consider the pros and cons and ensure that the bonds are used for qualified expenses to take advantage of the tax exclusion.
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Interest on savings bonds and income tax
Interest on savings bonds is generally considered taxable income. However, there are certain conditions under which you can avoid paying taxes on the interest accrued on your savings bonds.
Interest on Savings Bonds as Taxable Income
When you purchase a savings bond, you have the option to pay federal income tax on the interest accrued each year or to defer the tax payment until the bond matures or is cashed in, whichever comes first. This deferral can be for up to 30 years, but it's important to consider the potential impact on your tax bracket when the tax bill eventually arrives.
The interest accrued on your savings bonds is typically reported on Form 1099-INT, which you will receive from the financial institution that issued the bond or from your TreasuryDirect account. This form details the amount of interest the bond earned, which you must then report on your federal income tax return.
Exclusions and Exemptions
There are specific circumstances under which you may be exempt from paying taxes on the interest from your savings bonds. For example, if you use the proceeds from cashing in your savings bonds to pay for qualified higher education expenses at an eligible institution, a portion of the interest may be exempt from taxation. This exclusion applies to Series EE and Series I U.S. savings bonds issued after 1989, and there are additional requirements that must be met, such as age restrictions and ownership registration.
Additionally, interest earned on Series I bonds is exempt from state and local taxation. This exemption provides a significant advantage for bond owners, allowing them to save on taxes at the state and local levels.
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Interest on savings bonds and tax exclusion
Interest on savings bonds is generally subject to federal income tax but is exempt from all state and local income taxes. The interest you earn on your savings bonds becomes part of your gross income for tax purposes. However, under certain conditions, you can avoid taxes on the interest by using it to pay for higher education. This applies to Series EE or I savings bonds issued after 1989. They must be registered with you as the owner, and if you are married, they may be registered with you and your spouse as owners. The owner of the bond must be 24 years or older when the bond is issued. Therefore, a bond registered with a child as the owner will not qualify even years later when the child is ready for college. To take advantage of this tax exclusion, you must meet the following conditions:
- You were 24 years old or older before the bonds were issued.
- You cash the qualifying savings bonds in the same tax year for which you are claiming the exclusion.
- You paid qualified higher education expenses to an eligible institution that same tax year.
- Your modified adjusted gross income is less than the cut-off amount set by the IRS for the year in which you want to take the exclusion.
- You file your IRS tax return with any status except "married filing separately."
When you cash in your savings bonds or they mature, you will receive a Form 1099-INT, which will show you how much interest the bond earned. If your bonds are in a TreasuryDirect account, your 1099-INT will be available in your account by January 31 of the following year. You may choose to report the interest every year, which may be advantageous for savings bonds in a child's name. If you are reporting the interest on bonds owned by another person, such as a child's bonds, you report that on the other person's federal income tax return with other interest income they have earned.
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Frequently asked questions
Interest on savings bonds is taxable and must be reported on your federal income tax return. However, investors can exclude taxes on the bond's interest if it is used to pay for qualified educational expenses in the same year it is cashed.
Qualified educational expenses include tuition, fees, student activity fees, and related expenses required for enrollment at an eligible institution.
The federal government allows qualified holders of savings bonds to exclude from their income any interest paid when the bonds are cashed as long as the expenses are paid in the same tax year.
There are Series EE and Series I savings bonds. Series I bonds, also known as I bonds, are currently paying an attractive interest rate and offer inflation protection.
You will receive a Form 1099-INT for the year in which you get the interest. The form will tell you how much interest the bond earned. You will then report the interest on your federal income tax return.
