If you've already learned about Series EE savings bonds and you know how savings bond interest rates are determined, you'll want to learn about some of the major tax advantages.
Key Takeaways
- Series EE savings bonds earnings can be exempt from state and local taxes.
- If you invest in Series EE savings bonds for college, you can exclude part or all of the interest you earn over decades from your income taxes when the bonds are redeemed.
- When investing for education, you can also put the Series EE savings bonds in the name of your child with the parents (you) listed as the beneficiary (not co-owner).
Exempt From State and Local Income Taxes
One big benefit of Series EE savings bonds is that they are exempt from state and local taxes. This is very important if you are in a high-income tax bracket or live in a state such as New York that levy a substantial income tax rate on high earners. The bottom line is that it a bond that's exempt from state and local taxes means more money in your pocket.
Defer Income Taxes Until Redemption or Up to 30 Years
You can choose to report the interest your bond earns each year on your taxes, or wait until you redeem the bond. If you elect to wait, you can defer payment of taxes on the interest income of your Series EE savings bonds until you redeem the bond, whether after one year or when the bond matures at 30 years.
Each savings bond is a zero-coupon bond. That means that you don't actually get checks in the mail for the interest you are owed like you would with a corporate bond or municipal bond. Instead, the value of the interest owed to you is added to the bond principal, and you get the interest when the bond matures or you redeem it.
Note
Series EE savings bonds will pay interest for up to 30 years from the date they are issued.
Tax Benefits Based on Qualified Education Expenses
If you invest in Series EE savings bonds for college or other qualified education expenses, you can exclude part or all of the interest you earn over decades from your income taxes when you redeem the bonds. Some of the rules for this exclusion include:
- You must redeem the Series EE savings bond in the same year you incur the expenses for post-secondary education, such as tuition and fees.
- You must have been at least 24 years old before the bonds were issued.
- The bonds must be registered directly in your name, or in your and your spouse's name if you are married.
- Your filing status is not married filing separately.
- For tax year 2022, your modified adjusted gross income (MAGI) has to be less than $158,650 if married and filing jointly and $100,800 for all other filing statuses.
- The post-secondary institution that you attend must qualify for the Series EE savings bond program by being a university, college, or vocational school that meets federal assistance standards by offering programs such as guaranteed student loans from the Department of Education.
Note
Qualified educational expenses and fees include tuition and fees, lab fees, and books. Room and board are not considered qualified education expenses.
The amount of qualified expenses is reduced by the sum of any tuition reduction the student received, including scholarships, employer-provided educational assistance, and fellowships. Both the principal and the interest of the EE savings bonds must be used to pay the qualified expenses to exclude the interest from your taxable income.
If your bond proceeds exceed your qualified education expenses, then you get a prorated interest exclusion based on the percentage of your expenses compared to your bond. For example, if your expenses were $7,000 and your bond proceeds were $8,000 ($4,000 principal, $4,000 in interest), you'd get to exclude 80% of the interest you earned, or $3,200.
Frequently Asked Questions (FAQs)
How do I avoid paying taxes on EE bonds?
You may be able to avoid taxes on EE bond interest, generally speaking, if you paid for qualified education expenses with your bond proceeds in the year that you redeem the bond.
What is the benefit of EE bonds?
EE bonds give you a safe way to invest money. If you hold on to the bond for at least, it will double in value. Additionally, you can avoid taxation on some or all of the interest you receive when you redeem the bond if you have qualified education expenses you paid for with your bond proceeds.
FAQs
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 do I avoid paying taxes on Series EE 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.
Are Series EE bonds taxable when redeemed? ›
I cashed some Series E, Series EE, and Series I savings bonds. How do I report the interest? In general, you must report the interest in income in the taxable year in which you redeemed the bonds to the extent you did not include the interest in income in a prior taxable year.
Should I cash out my Series EE bonds? ›
If you want full value, you should hold the Series EE bonds at least until maturity, and if you want extra, you can hold them until 30 years. But once 30 years have passed, it's a good idea to cash them in because you won't get any extra benefit.
What is an advantage of investing in Series EE US Savings Bonds? ›
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 are EE bonds taxed at maturity? ›
Here's an example of how Series EE bonds are taxed. Bonds issued in January 1990 reached final maturity after 30 years, in January of 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest was taxable in 2020.
What happens to EE bonds after 30 years? ›
If you moved your EE bond into a TreasuryDirect account, we pay you for the bond as soon as it reaches 30 years and stops earning interest. If you still have a paper EE bond, check the issue date. If that date is more than 30 years ago, it is no longer increasing in value and you may want to cash it.
When should I cash in my series EE 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.
Does cashing EE bonds count as income? ›
Interest from your bonds goes on your federal income tax return on the same line with other interest income.
Is there a penalty for not cashing in matured EE savings bonds? ›
While the Treasury will not penalize you for holding a U.S. Savings Bond past its date of maturity, the Internal Revenue Service will. Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity.
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-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 |
All Series EE bonds reach final maturity 30 years from issue. Series EE savings bonds purchased from May 1995 through April 1997 increase in value every six months.
Do all EE bonds double in 20 years? ›
We guarantee that the value of your new EE bond at 20 years will be double what you paid for it. (If you have an EE bond from before May 2005, it may be earning interest at a variable rate. See more at EE bonds.) We guarantee that the interest rate of an I bond will never fall below zero.
What is the downside to EE bonds? ›
Inflation Risk. Inflation risk is another drawback of Series EE bonds. If the rate of inflation outpaces the interest rate earned on the bonds, the purchasing power of the bondholder's principal and interest payments may decline over time.
Are EE bonds ever worth more than face value? ›
The bond isn't worth its face value until it matures. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.
Do EE bonds always double in value? ›
EE bonds earn a fixed rate of interest, but, regardless of the rate, they are guaranteed to double in value if you hold them 20 years. Series I bonds earn a variable rate of interest that is tied to inflation.
What is the federal tax rate on 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 do I cash in matured EE bonds? ›
How do I cash my electronic bonds? Go to your TreasuryDirect account. Go to ManageDirect. Use the link for cashing securities.
Do I have to cash in my Series EE bonds when they mature? ›
You can hold your bond once it reaches maturity, but you won't earn any additional interest. On one hand, you can't spend a savings bond without redeeming it, so the value of your bonds would be considered "safe" from that standpoint.
