How to Avoid Paying Taxes on U.S. Savings Bonds (2024)

How to Avoid Paying Taxes on U.S. Savings Bonds (1)

I was born during the late 80s. During that time it was popular for people to buy savings bonds for children. It was an investment into the child's future. I would go as far as to say it was a popular gift from grandparents, great aunts, and great uncles. Well, now my fellow Millennials are having to deal with this savings tool from the past. Why? Because they are maturing.

What Grandma and Grandpa didn't tell you is that you will have to pay taxes on some of the bond when it matures. The interest. Today I'm going to walk you through a tax strategy that can help you avoid paying that tax. So grab your pen and paper as I break down how to avoid paying taxes on savings bonds.

What is a U.S. Savings Bond?

Before I get too deep into the process it's important that you understand what a savings bond is. A U.S. savings bond is a loan to the government. When you buy a bond you are giving your money to the United States. They then guarantee that they will pay it back with interest at a predetermined date.

Note: There are many types of bonds so I want to make a distinction that we are talking only talking about U.S. savings bonds today.

These bonds were born in 1935 during President Franklin D. Roosevelt's time in office. He signed a law allowing the Treasury Department to sell the first bonds at $25. Since that time the U.S. has issued many more bonds. Until 2012 taxpayers could purchase them at banks. Now you can only buy U.S. savings bonds from the government online. You can even purchase them with your tax refund.

There are two different types of U.S. savings bonds:

Series I Bonds

Series I bonds pay a fixed interest rate based on inflation. This protects you as an investor from inflation and is very low risk. You earn a fixed rate of interest and a rate that changes. The inflation rate is set in 6-month intervals.

You can have a bond for 30 years but you can cash it in after 12 months. There are consequences to cashing it in early. If you cash it in less than 5 years you lose the last 3 months of interest.

This means if Joyce purchases a Series I U.S. savings bond and holds it for 48 months she will only receive 45 months of interest.

You do have to pay Federal income taxes on Series I savings bond interest. But you do not have to pay taxes at the state and local levels. You can report the interest each year you earn it or when you cash the bond. You will report it on Schedule B of your 1040. You can avoid these taxes by using the money for qualified higher education expenses.

Series EE Bonds

Series EE bonds earn interest regularly for 30 years. They do not protect you from inflation. However, they have a guarantee that your investment will double after 20 years. Even if the government has to add the difference at year 20.

Let's say Kim's grandparents purchased a $10,000 series EE savings bond for her in 1992. In 2012 the bond would have been worth $20,000.

The interest on series EE bonds compounds semiannually. This means that every 6 months the government applies the interest rate to a new principle amount. This allows it to grow faster because the principle is also growing.

New series EE bonds, since May 2005, earn a fixed rate of interest for the first 20 years. The government may adjust the rate after that time. There are different rules for how the interest is compounded for earlier years. The time frames are:

  • Before May 1995

  • May 1995 - April 1997

  • May 1997 - April 2005

  • May 2005 - present

You do have to pay Federal taxes on the interest your series EE savings bond earns. You do not have to pay taxes at the state and local levels. The reporting is the same as series I bonds. You can also avoid paying taxes on the interest if you use the funds for qualified higher education expenses.

How to avoid paying taxes on U.S. savings bonds

The part we have all been waiting for...who can cash in their bonds tax-free? Like most IRS topics, it depends. You may qualify if you meet certain criteria. Part of that criteria includes an income threshold.

  • 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.

  • The government issued the bond after 1989.

  • You pay qualified education expenses for yourself, your spouse, or a dependent.

If your dependent is not college-age yet you can roll the money into a college savings account. These qualified tuition programs are better known as 529 accounts. Coverdell education savings accounts also qualify. This strategy will allow the money to grow even more to help pay for your dependent's higher education expenses. The principle will be tax-free if your dependent uses the money for the intended purposes. Then only the interest will be taxable.

If you do have current higher education expenses to pay these are the qualified expenses.

  • Tuition and fees are required for enrollment.

  • Contributions to a qualified tuition program (QTP).

  • Contributions to a qualified Coverdell education savings account (ESA).

You will have to reduce those expenses by any of the following tax-free benefits if you have them.

  • The tax-free part of scholarships and fellowship grants.

  • Expenses used to figure tax-free distribution from a Coverdell ESA

  • Expenses used to figure tax-free distribution from a QTP

  • Any tax-free payments (excluding gifts or inheritance) such as Veteran's educational benefits. Qualified tuition reductions and employer-provided educational assistance also count.

  • Any expenses used to figure out the American opportunity and Lifetime learning credits.

Unfortunately, if your income is above the thresholds mentioned above will not qualify for the U.S. savings bond exclusion.

Form 8815

If you have met all of the criteria so far, congratulations! You can exclude the interest from your series EE and series I U.S. savings bonds on Form 8815 of the 1040. Form 8815 helps calculate the amount of interest that you can exclude from your tax return. If all the interest was not used for a qualified higher education expense you will stay pay taxes on that amount.

Let's say that Kelli and Jarrod are a married couple filing jointly for 2022. In December of 2022, they cashed a qualified series EE U.S. savings bond from Kelli's grandparents. They received $12,000. $9,000 of that was principal and $3,000 was interest. In 2022 they paid $10,700 of their son's college tuition. They are not claiming any education credits and their son did not receive any education assistance. Their MAGI was $120,000. This is below the phase-out level so they can exclude the full eligible amount.

Kelli and Jarrod will be able to exclude $1,700 in interest from their income. They will still have to pay taxes on the remaining $2,300 that was not used for higher education expenses.

If in your planning you find that you were not able to exclude the interest, and now have a tax bill you can't pay don't fret. If you otherwise tax compliant and can pay it off within 36-72 months you may qualify for a Guaranteed Payment Plan. Check out my e-book Guaranteed Payment Plan to have your payment arrangement set up as soon as possible.

Summary

Savings bonds are a very low-risk savings tool. Qualifying taxpayers that have U.S. savings bonds maturing can avoid paying tax on the interest. The taxpayer will have to pay taxes on the interest if it is not used to pay a qualified higher education expense. Rolling the interest into a Qualified Tuition Program (529) or Coverdell education savings account is a good tax strategy for parents. It can help them lower their tax bill and save for their children's education at the same time.

Timalyn S. Bowens EA is America's Favorite EA and Tax Expert who will work hard to find a customized legal solution for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states. As the host of Tax Relief with Timalyn Bowens and a YouTube content creator she empowers taxpayers to make educated decisions about their tax situation.

When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information..

How to Avoid Paying Taxes on U.S. Savings Bonds (2024)

FAQs

How to Avoid Paying Taxes on U.S. Savings Bonds? ›

You can exclude the interest from your series EE and series I U.S. savings bonds on Form 8815 of the 1040. Form 8815 helps calculate the amount of interest that you can exclude from your tax return. If all the interest was not used for a qualified higher education expense you will stay pay taxes on that amount.

What is the best way to cash in U.S. savings bonds? ›

You can cash paper bonds at a bank or through the U.S. Department of the Treasury's TreasuryDirect website. Not all banks offer the service, and many only provide it if you are an account holder, according to a NerdWallet analysis of the 20 largest U.S. banks.

How much tax will I pay on my EE savings bonds? ›

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.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-Year Value (Purchased May 1990)
$50 Bond$100$207.36
$100 Bond$200$414.72
$500 Bond$400$1,036.80
$1,000 Bond$800$2,073.60

Will I get a 1099 for cashing in savings bonds? ›

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.)

How do I avoid taxes when cashing in savings bonds? ›

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. Only certain qualified higher education costs are covered, including: Tuition.

Is there a good time to cash in savings bonds? ›

You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.

Do savings bonds double every 7 years? ›

Series EE savings bonds are a low-risk way to save money. They earn interest regularly for 30 years (or until you cash them if you do that before 30 years). For EE bonds you buy now, we guarantee that the bond will double in value in 20 years, even if we have to add money at 20 years to make that happen.

How long does it take for $100 US savings bond to mature? ›

They're available to be cashed in after a single year, though there's a penalty for cashing them in within the first five years. Otherwise, you can keep savings bonds until they fully mature, which is generally 30 years.

How much is a $50 Patriot bond worth after 20 years? ›

After 20 years, the Patriot Bond is guaranteed to be worth at least face value. So a $50 Patriot Bond, which was bought for $25, will be worth at least $50 after 20 years. It can continue to accrue interest for as many as 10 more years after that.

How to avoid paying taxes on interest income? ›

You can make a number of moves to ease the tax burden from savings account interest, which include:
  1. Investing in a tax-deferred account such as a traditional individual retirement account or a 401(k).
  2. Stashing money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
Jan 25, 2024

How do you avoid tax on treasury bonds? ›

Using the money for higher education may keep you from paying federal income tax on your savings bond interest.

Do U.S. savings bonds count as income? ›

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.

Can I cash a savings bond at any bank? ›

Can you cash in a savings bond at any bank? Savings bonds can generally be redeemed with the bank where you have a checking account. For example, at Bank of America, customers who have had a checking or savings account open for at least six months can easily cash in their savings bonds.

Can I cash US savings bonds at US Bank? ›

To cash in a savings bond(s) at your local branch you must meet the following: A signer on a U.S. Bank checking, savings or money market account that has been open for five (5) years or more. Listed as the owner or co-owner of the savings bonds.

What documents do I need to cash a savings bond? ›

If you're cashing in a paper savings bond of $1,000 or less, you'll need FS Form 1522 and a copy of your driver's license, passport, state ID or military ID. If the bond amount is more than $1,000, you must have your signature certified by a notary or certifying officer.

How much is a mature $50 savings bond worth? ›

Total PriceTotal ValueTotal Interest
$50.00$69.94$19.94

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Kimberely Baumbach CPA

Last Updated:

Views: 5827

Rating: 4 / 5 (61 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Kimberely Baumbach CPA

Birthday: 1996-01-14

Address: 8381 Boyce Course, Imeldachester, ND 74681

Phone: +3571286597580

Job: Product Banking Analyst

Hobby: Cosplaying, Inline skating, Amateur radio, Baton twirling, Mountaineering, Flying, Archery

Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.