Are savings bonds tax-exempt?
16. 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.
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent.
The interest on EE bonds isn't taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn't made so bond holders receive the benefits of tax deferral.
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.
The grandparent does not need to be the account owner of the 529 college savings plan. The grandparent redeems the savings bonds and contributes the proceeds to the 529 college savings plan within 60 days. The beneficiary of the 529 plan is changed from the grandparent to the grandchild.
Another thing to note: Savings bonds don't get a step-up in basis at death the way stocks or other investments do. That means you have to pay tax on the full amount of interest due on the bonds as the inheritor.
If you cash a paper savings bond at a local bank, that bank is responsible for giving you a 1099. If you cash a paper savings bond by mailing it to Treasury Retail Securities Services, we mail you a 1099 by January 31 of the following year. (You can call us for a duplicate statement, if needed, beginning February 15.)
The interest on your I bond falls on the same line as other interest income whether you choose to report it every year or all at once at the end of your ownership. Interest the bond earns is reported on a 1099-INT after the bond is cashed or reissued.
Depending on the interest rate of your bond and your own financial needs, it's generally beneficial to wait until full maturity to redeem them.
Municipal bonds are generally exempt from federal taxes and, in many cases, state and local taxes as well. As the saying goes, "nothing is certain in life but death and taxes," and this adage seems especially true for bond investors.
How to avoid paying taxes on interest income?
- Investing in a tax-deferred account such as a traditional individual retirement account or a 401(k).
- Stashing money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
Once a Series EE bond reaches its final maturity, it stops earning interest, but there are no penalties associated with holding onto it beyond that point. After the 30-year period, the bond has reached its maximum value and it won't continue to accrue interest.
The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
Estates and Trusts
Yes, you may redeem a bond to the estate of the last decedent on a bond. Retain both death certificates and a copy of the letters of appointment for the representative. Redemption requests may also be sent to the Treasury Retail Securities Site at the Federal Reserve Bank of Minneapolis.
On the 2024-25 FAFSA, students are no longer required to report cash gifts from a grandparent or contributions from a grandparent-owned 529 savings plan. Because of this, grandparents can now use a 529 plan to fund a grandchild's education without impacting their financial aid eligibility.
Yes. You can roll over the U.S. savings bonds into a 529 plan if you meet all of the requirements for income-tax-free use of the savings bonds.
You owe tax on the interest the bond earned until it was reissued. You are the new owner of a reissued bond. You owe tax on the interest the bond earns after it was reissued.
The individual owns the U.S. Savings Bond if only his or her name appears on it. The Social Security Number shown on a bond is not proof of ownership. EXAMPLE: A U.S. Savings Bond title reads, âJohn Smith.â Only John Smith can cash that bond.
Note: Do not buy savings bonds from someone else or in an online auction site. You cannot cash them. You can only cash bonds that you own or co-own unless you have legal evidence or other documentation that we accept to show you are entitled to cash the bond. How do I know how much my bond is worth?
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.
How do I cash a savings bond without paying taxes?
- Your filing status is not married filing separately.
- Your 2022 Modified Adjust Gross Income (MAGI) is less than $158,650 if married filing jointly and $100,800 if head of household status.
- The owner of the bond is at least 24 years old before the bond's issue date.
If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.
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.
Those who invest in bonds can owe taxes on interest income and capital gains. Each year, bondholders receive IRS Form 1099-INT (or Form 1099-OID) from entities that paid them interest on the bonds in which they invested.
You need 1099-INTs for all of your investments that paid you taxable money to calculate your taxes and to send in with your tax return. Note: You only get a 1099-INT if you actually got the interest on a savings bond.
