Finance Blog

When Do I Pay Taxes on the Interest Earned from Savings Bonds?

Written by Eva Rosenberg on December 13, 2013 in Tax  |   1 comment

At one of my jobs long ago, I arranged to have $25 taken out of each monthly paycheck to buy a $50 U.S. savings bond. The money wasn’t missed, and the savings added up to $600 worth of long-term savings for only a $300 annual…

paying taxes on savings bondsAt one of my jobs long ago, I arranged to have $25 taken out of each monthly paycheck to buy a $50 U.S. savings bond. The money wasn’t missed, and the savings added up to $600 worth of long-term savings for only a $300 annual investment.

These days, my clients and readers don’t ask about using payroll withdrawals to buy bonds. Instead, people who want U.S. savings bonds must go out and buy them on their own. The denominations are larger, the rate of return is lower, and the bonds come with a variety of tax options.

While financial institutions no longer sell U.S. savings bonds, you can buy them online or using your federal income tax refunds.

How are savings bonds taxed?

Savings bonds are only subject to federal income tax—your state does not tax them. Taxes can be deferred until you redeem the bond or until the bond reaches final maturity, whichever happens first.

The usual way of paying taxes on savings bond earnings is to report them when the bond is finally cashed in. Older bonds that were purchased in the last century have a much higher interest rate than current bonds, which means that the accumulated interest on these bonds can be quite significant.

For example, a $50 EE/E bond purchased in 1983 for $25 would be worth $140 in January 2013. Imagine if you had bought 12 of those in 1983. The combined interest when you finally cashed them in would be over $1,115 instead of about $50 per year had the interest been reported annually.

You can avoid paying taxes on the earned interest by using EE/E bonds or I bonds to finance education. (IRS Publication 970 explains the guidelines and restrictions, as well as what expenses are eligible.)

Or, you can pay tax on the interest each and every year after your investment.

This is a wise choice for three reasons:

1. Earnings tend to be relatively low on a bond in a given year, so the tax bite is often minimal.
2. When you ultimately cash the bond in, the earnings will be taxed at a higher rate—especially because taxes rise over decades.
3. After you die, your heirs will pay taxes on all the earnings unless you have reported the income along the way. Be sure to keep records so your fiduciary knows you’ve been doing this.

Most people don’t realize that annual reporting is even an option. After all, you don’t get an annual 1099-INT showing your earnings each year, so there’s nothing to jog your memory. Besides, without the 1099-INT, how can you even know how much to report? That’s easy—just use this handy-dandy calculator provided by the U.S. Treasury’s website.

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

1 comment

  1. Alan Foster says:

    Do you pay FICA as well as income tax on paper bonds issued prior to 1995 and redeemed this year?

Leave a Comment

Name :

Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.

Tax Archive

Stay Informed Sign up for our FREE Equifax email Newsletter