Are US federal bonds taxable?
Interest from corporate bonds and U.S. Treasury bonds interest is typically taxable at the federal level. U.S. Treasuries are exempt from state and local income taxes. Most interest income earned on municipal bonds is exempt from federal income taxes.
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 also have the option of claiming interest annually for federal income tax purposes.
The interest from most, but not all, agency bonds is exempt from local and state taxes. Farmer Mac, Freddie Mac, and Fannie Mae agency bonds are fully taxable. Agency bonds, when bought at a discount, may subject investors to capital gains taxes when they are sold or redeemed.
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.
U.S. Treasuries are exempt from state and local income taxes. Most interest income earned on municipal bonds is exempt from federal income taxes.
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.
Treasury bills are taxed at the federal level but not by state and local governments. Many investors use them as a means to preserve capital when there is market turmoil, but they can also be used in other investment strategies.
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.
If you invest in TreasuryDirect, your 1099 will be available electronically and you can print the form from your account. 1099 forms are available by January 31 of each tax year.
The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
Are muni bonds exempt from federal tax?
A major benefit of municipal bonds, or "munis," is that the interest they pay is generally exempt from federal income taxes. They're also generally exempt from state income taxes if the issuer is from the investor's home state.
Municipal bonds are generally referred to as tax-exempt bonds because the interest earned on the bonds often is excluded from gross income for federal income tax purposes and, in some cases, is also exempt from state and local income taxes.
Interest rate risks: As are all bonds, Treasury bonds are subject to price volatility as a result of changes in market interest rates. Inflation risk: The interest earned on Treasury securities may not keep pace with inflation (with the exception of Treasury inflation-protected securities, or TIPS).
What you earn from your Treasury marketable securities is subject to federal tax but is exempt from state and local taxes.
Income from bonds issued by the federal government and its agencies, including Treasury securities, is generally exempt from state and local taxes.
T-Bill Tax Considerations
The interest income that you may receive from investing in a treasury bill is exempt from any state or local income taxes, regardless of the state where you file your taxes. However, you will need to report interest income from these investments on your federal tax return.
Normally, the interest you earn on your savings bonds becomes part of your gross income for tax purposes. Under certain conditions, though, you can avoid taxes on the interest by using it to pay for higher education.
- 401(k) / 403(b) Employer-Sponsored Retirement Plan. ...
- Traditional IRA / Roth IRA. ...
- Health Savings Account (HSA) ...
- Municipal Bonds. ...
- Tax-Free Exchange Traded Funds. ...
- 529 Education Fund.
Interest from munis is generally exempt from federal taxes, and if you live in the state where the bond was issued, the interest may also be exempt from state taxes. (However, not all municipal bonds qualify for these tax benefits, so be sure to check with your investment advisor before buying.)
Owners can wait to pay the taxes when they cash in the bond, when the bond matures, or when they relinquish the bond to another owner. Alternatively, they may pay the taxes yearly as interest accrues. 1 Most owners choose to defer the taxes until they redeem the bond.
How are zero coupon T bills taxed?
Zero-coupon Treasuries are taxed as if you were receiving annual interest income, even though you won't receive any income until the bond matures.
Treasury securities are issued in a wide range of maturities, from four weeks to 30 years. Generally, they are non-callable and the interest payments are exempt from state and local taxes – especially important for investors residing in high-tax states.
- TreasuryDirect: In your TreasuryDirect account, tell us the percent to withhold.
- Legacy Treasury Direct: Call or write to us to tell us the percent to withhold. The phone number and address are in the section above.
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
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.
