Savings bonds for a long time have been a popular investment to add to your portfolio. They provide some stability to your investments, a guaranteed rate of return, and can help you save on your taxes. Some investors have owned Series I savings bonds for many years, and the 30-year maturity date might be approaching. Others have bought them in recent years to insulate their portfolios from inflation and the ups and downs in the stock market. Either way, you should be aware of the federal income tax rules.
I bonds have important tax advantages for owners, because interest earned on I bonds are exempt from state and local taxation. Also, you can defer federal income tax on the accrued interest for up to 30 years. While that seems simple, there are a lot of things to consider. For example, the tax treatment of I bonds varies depending on who owns the bonds, whether you give them as a gift, or it could be how the bonds are used.
Before 2025, taxpayers who were due a refund on their federal tax return could attach Form 8888 to their 1040 to request to use all or part of the money to buy up to $5,000 in paper I bonds. And people with a Treasury Direct account could use all or part of their tax refund to buy up to $10,000 of electronic I bonds. The IRS has ended this feature. If you want to buy an I bond, you must open an account with Treasury Direct. (If you own EE bonds, the federal income tax consequences are identical to those of I bonds.)
Here is what you need to know depending on your situation:
Buying Bonds for Yourself
You have a choice when you acquire the bonds. They can pay federal income tax each year on the interest earned or defer the tax bill to when you redeem them. (Most people choose the latter.) You report the interest income on their Form 1040 for the year the bonds mature (generally, 30 years) or when they're cashed in, whichever comes first. Now, deferring tax on the full amount of accrued interest for up to 30 years may sound like a great idea until you get the tax bill for three decades worth of interest. This could also push you into a higher federal income tax bracket, making your taxes due even higher. You might want to take a look at what your situation might be when it comes time to cash them in.
Giving Bonds as Gifts
While savings bonds make great gifts, if you buy I bonds for someone else, the interest is reportable by that person, provided the bonds are titled in his or her name. Just like any other holder of I bonds, the recipient may choose to defer paying tax on the interest until the year the bonds mature or are cashed in, or he or she can report the interest annually.
Buying Bonds Jointly
If your bonds are issued in the name of co-owners, such as a parent and child or grandparent and grandchild, the interest is generally taxable to the co-owner whose funds were used to buy the bonds. Life above, the co-owner may choose to defer paying tax on the interest or report it annually - even if the other co-owner redeems the bonds and keeps all the money.
How to Pay Your Taxes on Redemptions
The year you cash them in, you must report the interest on line 2b of your Form 1040 and pay tax on any interest you didn't include on your taxes in a prior year. If you received $1,500 or more in interest during the year, you would also have to fill out Schedule B and attach it to your tax return.
Holding Them Until Maturity
If you keep the I bonds through the date they mature, generally 30 years, and you didn’t include the interest income in a prior year, you will be taxed on all the accrued interest in the year of maturity, whether or not you cash them in. Again, this would be reported on line 2b of Form 1040 and you would attach Schedule B if you earned $1,500 or more of interest.
Using Bonds for Education
One way to avoid paying federal income tax on accrued I bond interest is to use the distribution to help pay for college or other higher education expenses for you, your spouse or your dependent. Let’s review the rules you must adhere to for this tax break. For instance:
- You must have purchased the bonds after 1989 when you were at least 24 years old;
- The bonds must be in your name only;
- The bonds must be redeemed to pay for undergraduate, graduate or vocational school tuition and fees for you, your spouse, or your dependent;
- Grandparents can't use this tax break to help pay for their grandchild's college tuition unless the grandparent can, on their 1040, claim the grandkid as a dependent;
- Room and board costs aren't eligible for the exclusion; and
- The exclusion is subject to strict income limits. For 2024, it begins to phase out at modified adjusted gross income of more than $145,200 for joint filers and $96,800 for others. For 2025, it begins to phase out at modified adjusted gross income of more than $149,250 for joint filers and $99,500 for others. This is adjusted for inflation.
If the proceeds from all savings bonds cashed in during the year exceed the qualified education expenses paid that year, the amount of interest you can exclude has to be reduced proportionally. (You use IRS Schedule B and Form 8815 to report and calculate any excluded I bond interest used for education.)
Giving Away Bonds Your Already Own
If you give an I bond to someone before it matures, it will accelerate the taxation of the interest income. Nor does giving away bonds you already own to someone else get you off the hook with the federal government for owing money on previously untaxed interest. Even if the bonds are reissued in the gift recipient's name, you still get taxed on all that interest in the year of the gift.
Donating Bonds to Charity
Donating I bonds before they mature to a charity while you're alive will also accelerate taxation of the interest income. As with gifts to other people, giving away bonds you already own to your alma mater, favorite museum or other charitable organization doesn't let you avoid the tax on previously untaxed interest. You're taxed on all that interest in the year the donation is made.
If You Inherit I Bonds
If they haven't yet matured, who is taxed on the accrued interest that went untaxed because the original owner deferred the interest? It depends. The executor of the decedent's estate can choose to include all pre-death interest earned on the bonds on the decedent's final income tax return. If this is done, the beneficiary reports only post-death interest on Form 1040 for the year the bonds mature or are redeemed, whichever comes first. If the executor doesn't include the interest income on the deceased owner's final federal income tax return, the beneficiary will owe taxes on all pre-death and post-death interest once the bond matures or is redeemed, whichever is earlier.