How Are Savings Bonds Taxed? (2024)

FAQs

How Are Savings Bonds Taxed? ›

Key Takeaways. Interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. The interest that savings bonds earn is the amount that a bond can be redeemed for above its face value or original purchase price.

How are savings bonds taxed? Savings bond interest is exempt from state and local income tax. Savings bond interest is subject to federal income tax; however, taxation can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first.

How that income is taxed depends on the underlying investments that are generating that income. The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes.

Individuals do not pay tax on their bond gains until a chargeable event occurs. This tax 'deferral' is one of the features that sets bonds aside from other investments. However, when a chargeable event does occur, a gain will be taxed in the tax year of that event.

The Education Tax Exclusion

The IRS lets you avoid paying taxes on interest earned by Series EE and Series I savings bonds when you redeem them if you use the money toward qualified higher education costs for yourself, your spouse, or any of your dependents.

In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.

If you cashed in I bonds last year, you must report the interest on line 2b of Form 1040 and pay tax to the extent you didn't otherwise include the interest income in a prior year.

Unlike individual bonds, which usually make semiannual interest payments, bond funds usually make monthly distributions that can be paid directly to the investor or reinvested into the fund to compound returns.

In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer's qualification for certain other tax breaks. The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.

Are bonds taxed as capital gains or ordinary income? ›

So, the profit you make from selling a bond is considered a capital gain. Capital gains are taxed at different rates depending on whether they're short-term or long-term. Short-term capital gains apply if you hold the bond for one year (365 days) or less. Then the gain is taxed at your ordinary income tax rates.

Municipal Bonds

Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes.

Q. What is the 5% tax deferred allowance? A. This is a rule in tax law which allows investors to withdraw up to 5% of their investment into a bond, each policy year, without incurring an immediate tax charge.

While the Treasury will not penalize you for holding a U.S. Savings Bond past its date of maturity, the Internal Revenue Service will. Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity.

Because US Savings Bonds are federal assets, they do not have to abide by the California Probate Code. The threshold for US savings bonds must go through probate is $100,000 or more.

Yes. The owner can transfer EE and I Bonds to another person with a TreasuryDirect account; however, you must wait five business days after the purchase date to transfer the bonds. Are there any fees for transferring EE and I Bonds? No.

They're available to be cashed in after a single year, though there's a penalty for cashing them in within the first five years. Otherwise, you can keep savings bonds until they fully mature, which is generally 30 years.

The current composite rate (which is the yearly rate that applies for 6 months) for Series I Savings Bonds in place during the 2024 Tax Filing Season is 5.27%.

Interest Earned and Taxation

These bonds increase in value every month, and interest is compounded semiannually. A 3-month interest penalty will apply to bonds cashed before five years.