What is the income tax rate on bonds?
The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate. Bonds held for more than a year will be subject to potentially lower long-term capital gains rates.
Tax on interest
The interest you earn on corporate bonds is generally always taxable. Most all interest income earned on municipal bonds is exempt from federal income taxes. When you buy muni bonds issued by the state where you file state taxes, the interest you earn is usually also exempt from state income taxes.
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.
T-Bill | CD | |
---|---|---|
Fed tax | 24.00% | 24.00% |
State tax | 0.00% | 9.90% |
Post Tax % of Yield | 76.00% | 66.10% |
Real Yield | 3.40% | 3.40% |
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.
Both I Bonds and EE Bonds offer certain tax benefits. The interest earned on these bonds is subject to federal income tax but exempt from state and local taxes. Additionally, if the proceeds from either bond type are used to pay for qualified higher education expenses, the interest may be tax-free at the federal level.
- 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.
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes.
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.
What are the disadvantages of investing in Treasury bonds?
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).
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.)

Fund | Symbol | 1-year total return |
---|---|---|
PIMCO High Yield Spectrum Instl | PHSIX | 14.07 |
T. Rowe Price US High Yield I | TUHIX | 14.32 |
Nuveen Preferred Secs & Inc I | NPSRX | 6.16 |
Nuveen Flexible Income I | NWQIX | 8.94 |
Treasury bills function more like cash in your portfolio and can be a safe harbor during turbulent economic times. Treasury bonds can provide a dependable stream of income, but can suffer a loss of value on secondary markets if interest rates go up.
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.
Currently, Treasuries maturing in less than a year yield more than CDs. However, at maturities of one year and beyond, CDs yield a little more before taxes. Therefore, all things considered, it likely makes more sense to choose Treasuries over CDs for shorter-term investments, but it depends on your situation.
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.
TAKEAWAYS: Not losing money by holding a bond until maturity is an illusion. The economic impact of market rate changes still impacts investors holding bonds until maturity. A bond index fund provides an investor with greater diversification and less risk.
The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate. Bonds held for more than a year will be subject to potentially lower long-term capital gains rates.
Which bonds are tax free?
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.
Variable interest rates are a risk you can't discount when you buy an I bond, and it's not like you can just sell the bond when the rate falls. You're locked in for the first year, unable to sell at all. Even after that, there's a penalty of three months' interest if you sell before five years.
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.
If a financial institution pays the bond, you get a 1099-INT from that financial institution either soon after you cash your bond or by January 31 of the following year. If your bonds are in your TreasuryDirect account, your 1099-INT is available in your account by January 31 of the following year.
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.