Tax Planning
Savings bonds offer many tax advantages:
- Savings bonds are exempt from state and local income taxes. But, savings bonds are subject to state and local estate taxes, inheritance, gift, and other excise taxes, whether Federal or State.
- The education tax exclusion permits qualified taxpayers to exclude from their gross income all or a portion of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989. The bond owner must use the bonds to pay for qualified higher education expenses at an eligible institution. Find out more about Education Planning.
- Buy savings bonds in a child's name. If the child's interest is reported annually, taxes might be eliminated on interest earnings during years when the child's income is sufficiently low.
- When planning for retirement keep in mind that you can cash bonds to supplement your retirement income and report the tax-deferred interest as income for that year, when you may be in a lower income tax bracket.
If you only look at the rate your savings bonds are earning, they may not seem like a competitive investment at first. But when you factor in all the tax advantages, your bonds are earning more than you think. Use our Tax Advantages Calculator to see for yourself.
Reporting Interest
There are two ways you can report the interest your bonds earn.
- Report the interest as it accrues annually.
- Wait until the bonds are redeemed or reach final maturity.
If you want to switch from deferred reporting to annual reporting of interest, you must do it for all your savings bonds. You must also report all interest earned up to the year of the change in reporting procedure. You must submit IRS Form 3115 if you later wish to change back from annual reporting to deferred reporting. The fee for Form 3115 is waived in these cases.
