Taxation Basics of EE U.S. Savings Bonds

Taxation Basics of EE U.S. Savings Bonds

Let me explain the basics: according to Treasury Direct, the interest from EE U.S. savings bonds gets taxed at the federal level, but you won't face state or local income taxes on it. That interest is essentially what the bond redeems for above its face value, which is the original price you paid. Keep in mind, this interest also falls under federal gift, estate, and excise taxes, and on the state side, it might apply to estates or inheritances.

Key Takeaways on Bond Taxation

To sum it up directly for you, the interest is federally taxed but exempt from state and local income taxes. It's the extra amount over the face value when you redeem it. And yes, it's subject to those federal gift, estate, and excise taxes, with state taxes potentially hitting estates or inheritances.

Understanding How Savings Bonds Are Taxed

The key here is ownership—it dictates who pays the tax on the interest. If you buy the bond and stay the sole owner throughout, you're the one owing the taxes. For a child as sole owner, a parent can report and pay on their own return.

But ownership can get tricky, and that affects tax responsibility. You should check the tax considerations section on the Treasury Direct website for the full outline. I'll cover some scenarios below, but remember, tax rates can shift based on U.S. Treasury and IRS policies—consult a tax professional for your situation.

Ownership Scenarios Impacting Taxes

If you purchase the bond and add someone as co-owner who stays on for the bond's life, you're responsible for the taxes. But if you buy it and list someone else as the sole owner, that person handles the interest taxes.

For proportional ownership, if two people split the cost, each pays taxes based on their share. Say you and a friend buy a $1,000 bond, with you paying $400 and them $600—you owe 40% of the taxes, they owe 60%.

There's an exception for spouses in community property states: they each pay half if filing separately. Also, if ownership changes, each owner pays only for interest accrued during their time. For example, if you own from 2020 to 2024 and then pass it to someone else, you cover 2020-2024 interest, and they handle post-2024.

Note on Inheriting Bonds

If you inherit Series EE or I bonds, you can skip taxes on redemption if you use the money for qualified higher education—for yourself, your spouse, or a dependent.

Reporting the Interest for Taxes

You can wait to pay taxes when cashing in, at maturity, or when giving it to another owner. Or pay yearly as it accrues. Most people defer until redemption.

Once mature and no longer earning interest, it's considered redeemed, and the IRS gets a 1099-INT report—you include it on your tax return. If you report yearly, you must do so for all your bonds and notify the IRS at maturity that it's been handled that way.

How Does an EE Savings Bond Work?

An EE bond is a U.S. government security you buy at face value with a fixed interest rate. The government guarantees it doubles in 20 years. It earns monthly interest over 30 years, compounded every six months. You can cash out after one year, but before five years, you lose three months' interest as a penalty.

How Long Does It Take for an EE Savings Bond to Mature?

It matures in 30 years. Cash out after one year if needed, but pre-five years means owing three months' interest.

How Much Is an EE Bond Worth After 20 Years?

It's worth at least double, guaranteed. For a $50 bond, that's $100 minimum after 20 years. The smallest you can buy is $25.

The Bottom Line

Your EE bond interest faces federal income, gift, estate, and excise taxes but skips state and local income taxes. Taxation hinges on ownership, even if split. You decide whether to defer until maturity or redemption or pay annually.