Interest on US Savings Bonds and Treasury Obligations Tax Guide

If you're looking to earn some extra interest on your savings, US Savings Bonds and Treasury Obligations are great options to consider. You can earn interest on these investments, and it's tax-free until you cash them in.

The interest on US Savings Bonds is exempt from state and local taxes, but it is subject to federal taxes. This means you'll need to report the interest earned on your tax return.

You can earn interest on these investments, and it's tax-free until you cash them in. The interest rate on US Savings Bonds is determined quarterly and is based on a combination of market conditions and the Treasury's cost of borrowing.

Interest on Savings Bonds can be a great way to earn some extra cash, especially for those who are saving for a specific goal or want to teach kids about money.

Savings bonds are available in two main types: Series EE and Series I bonds. Series EE bonds offer a fixed interest rate, which is currently 0.10% per year.

The interest on Series EE bonds is compounded semiannually, meaning it's added to the bond's face value twice a year. This can add up over time, making the bond's value increase.

You can purchase Savings bonds online or through a mobile app, and you can also use your tax refund to buy them.

You'll report interest from your bonds on your federal income tax return, just like other interest income. This includes interest from bonds you own and bonds owned by others, like your child.

If you're reporting interest on bonds owned by someone else, you'll do so on their tax return, not yours.

The person who owns the bond is responsible for paying the tax on the interest, unless you and someone else co-own the bond and split the ownership equally, in which case you'll each report half of the interest.

Here's a breakdown of who owes the tax in different situations:

If ownership remains unchanged, it's essential to understand who owes the tax on savings bonds. You owe the tax if you're the only owner of the bond.

When you buy a bond with a co-owner, using your own money, the tax responsibility lies with you. This is the case even if someone else is named as the owner.

However, if someone else is named as the sole owner, they're responsible for reporting the interest, not you. This might seem counterintuitive, but it's essential to understand the ownership structure.

If you and another person buy a bond together, each contributing to the purchase price, you'll both report the interest in proportion to your investment. This means you'll each report the interest based on the amount you paid for the bond.

In community property states, where you and your spouse file separate federal income tax returns, you'll each report one-half of the interest if the bond is community property. This is a key consideration for couples living in these states.

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Regular taxable interest is taxed as ordinary income, just like an IRA or retirement plan distribution. This means it's added to your other income, such as wages or salary, to calculate your marginal tax rates.

Municipal bond interest is exempt from all taxation, unless the alternative minimum tax (AMT) applies. This is a nice perk, but it's essential to understand the rules to avoid any surprises.

Interest from Series EE and Series I bonds issued after 1989 can be excluded from tax if you use the money to pay for qualified higher educational expenses, and you meet the requirements for the Educational Savings Bond Program.

Tax-exempt income includes interest earned on certain types of municipal bonds, such as bonds issued by state and local governments. Interest earned on these bonds is exempt from all taxation unless the alternative minimum tax (AMT) applies.

Interest earned on certain U.S. savings bonds, such as Series EE and Series I bonds, is exempt from state and local income taxes. This is a great perk for those who hold these bonds.

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Interest earned on 529 plans is usually exempt from federal taxes. If you're saving for education expenses, consider using a 529 plan to save on taxes.

Taxpayers must report taxable and non-taxable income on their tax return, even if they did not receive the appropriate 1099 forms. This includes tax-exempt income.

Here are some examples of tax-exempt income:

When you earn interest on your US savings bonds or Treasury obligations, you'll need to report it on your tax return.

You report interest from bonds on the same line with other interest income on your federal income tax return.

If you're reporting interest on bonds owned by someone else, such as a child, you'll report it on that person's tax return with their other interest income.

Savings bond interest is subject to federal income tax, but fortunately, it's exempt from state or local income tax. This means you'll only have to worry about federal taxes.

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The good news is that using your savings bond money for higher education can keep you from paying federal income tax on the interest. This is a great incentive for saving for education expenses.

You'll also need to consider federal estate, gift, and excise taxes, as well as state estate or inheritance taxes, when it comes to your savings bond. These are important to keep in mind, especially if you're planning to pass on your bond to someone else.

Here's a quick summary of the tax implications of savings bonds:

Keep in mind that your "Taxable Transaction Summary" is not the same as your 1099.

You can report the interest on your savings bonds either when you file your federal income tax return for the year you actually get the interest, or every year, even if you don't get the interest then.

If you choose to report the interest every year, it can be beneficial, especially if the bond is in a child's name and they're paying taxes at a lower rate than they will later.

You won't receive a 1099-INT every year, but you can see the interest earned each year in a TreasuryDirect account, or use the Savings Bond Calculator to figure out the interest to report if the bonds are on paper.

You can report the interest in earlier years by following the instructions in IRS Publication 550, specifically the section on U.S. Savings Bonds.

Here are your reporting options:

You may choose to report the interest every year, especially if you have savings bonds in a child's name. This can be advantageous if the child is paying taxes at a lower rate than they will later on.

You won't get a 1099-INT every year, but you can still report the interest earned each year. If the savings bonds are in a TreasuryDirect account, you can see the interest earned each year in the account.

If the savings bonds are on paper, the Savings Bond Calculator can help you figure out the interest to report. You'll need to use this calculator to determine the interest earned each year.

When you get the 1099-INT at the end, it will show all the interest the bond earned over the years. You can use this form to report the interest you've already reported in earlier years.

To report interest you've already reported, go to IRS Publication 550 and look for the section on U.S. Savings Bonds. This will guide you through the process of telling the IRS you've already reported some or all of the interest.

Here's a quick summary of how to report interest every year:

Interest earned on US Savings Bonds and Treasury obligations is subject to federal income tax, but not state or local taxes.

You'll receive a Form 1099-INT from the Treasury Department showing the interest earned.

Interest on US Savings Bonds is exempt from state and local taxes, but not federal taxes.

You can report the interest on your tax return and claim a credit for any taxes withheld.

A different take: State Bonds

Treasury obligations, such as Treasury bills, notes, and bonds, are taxed as ordinary income, and you'll receive a Form 1099-INT for the interest earned.

You can choose to have taxes withheld from your Treasury obligation interest, which will reduce the amount of taxes owed when you file your tax return.

EE and I Bonds are two types of US savings bonds that can help you earn interest on your investment. You can buy them in electronic or paper form, but as of January 1, 2025, I bonds are only available electronically through your TreasuryDirect account.

EE and I bonds earn interest monthly, and the interest is compounded semiannually, meaning it's applied every 6 months to a new principal value. This makes your bond's value grow both because it earns interest and because the principal value gets bigger.

You can cash in your I bond after 12 months, but if you do so in less than 5 years, you'll lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you'll get the first 15 months of interest.

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Here's a summary of the key facts about EE and I bonds:

You can find the value of your Series I electronic bond in your TreasuryDirect account, or use the Savings Bond Calculator to find the value of a paper Series I bond.

If you're thinking of buying EE or I bonds, it's a good idea to consider your financial goals and time horizon. You can buy an I bond for as little as $25, or any amount above that to the penny.

You can buy I bonds in your TreasuryDirect account, and as of January 1, 2025, they will only be available electronically. This makes it easy to keep track of your investments and see the value of your bonds in real-time.

I bonds earn interest monthly, and the interest is compounded semiannually. This means that the principal value of your bond will grow over time, in addition to earning interest.

You can cash in an I bond after 12 months, but if you do so before 5 years, you'll lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you'll get the first 15 months of interest.

To help you decide when to buy, here's a quick summary of the key points:

Keep in mind that I bonds are available for 30 years, unless you cash them in before then. And, as with any investment, it's always a good idea to consider your personal financial situation and goals before making a decision.

If you're switching from one method to another, you need to know the rules. You may change from deferring to reporting interest on your EE and I Bonds at any time without permission from the IRS.

This change applies to all savings bonds for the Social Security Number whose tax return this is. You'll need to report all interest earned by those bonds in previous years, not just the interest earned in the year you're changing your method.

To switch from reporting to deferring interest, you'll need to fill out IRS Form 3115. Alternatively, you can follow the instructions in IRS Publication 550 in the section on U.S. Savings Bonds.