Ask the Expert: How are EE savings bonds taxed?
Please explain how interest is taxed when you cash in a 30-year EE savings bond. If you paid $5,000 for a bond with a $10,000 face value and you cash it in after earning $4,000 of interest, is the $4,000 your total interest? Or is it the $9,000 you receive when you cash it in? What’s reported to the IRS? Is anything tax-exempt?
The $9,000 you received is the $5,000 tax-free return of your principal and $4,000 of federally taxable interest. Interest on U.S. savings bonds is exempt from state and local income taxes. Bond owners can pay the federal tax annually as interest accrues, or defer it until the bonds mature, are cashed in or change ownership. Not surprisingly, almost everyone defers the tax.
The financial institution that cashed the bond will report the $4,000 interest payment to the Internal Revenue Service, and also to you in a Form 1099-INT.
Since January 2012, EE bonds have only been issued electronically and sold for their face amount. But paper bonds issued before January 2012 were sold for half their face amount. (A $10,000 bond sold for $5,000, for example.) Paper bonds with an issue date of May 2005 or later are guaranteed to be worth at least their face value after 20 years; but they keep earning interest until their 30 year maturity or until you cash them, whichever comes first.
Electronically sold EE bonds with an issue date of June 2003 or later are guaranteed to be worth twice their purchase price after 20 years. When electronic EE Bonds in a TreasuryDirect account stop earning interest, they’re automatically cashed and the interest earned is reported to the IRS.
The bottom line
Interest earned on U.S. savings bonds is federally taxable but free of state tax.
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