With inflation, market shifts, and economic uncertainty, many people are revisiting old savings strategies, including cashing in their savings bonds. But before you redeem, it’s critical to understand how interest from these bonds is taxed. Cashing in a bond at the wrong time, or failing to plan for taxes, can cost you. 

Quick Takeaways

  • Interest isn’t taxed annually unless you choose it to be.
  • Education exclusions could make interest tax-free, but income limits and other restrictions apply.
  • Bonds stop earning interest after 30 years. Don't leave money on the table.
  • You may be able to reduce taxes by timing redemption in a low-income year.

What is a savings bond?

A savings bond is a low-risk investment issued by the U.S. Department of the Treasury. You buy it from the Treasury, and over time, it earns interest and grows in value.

Here’s a look at some common types of savings bonds. Each type has its own features, interest rates and tax rules.

Understanding Series EE Bonds: Key Features

  • Fixed or Variable Interest
    • Bonds issued after May 2005 earn a fixed rate.
    • Bonds issued from May 1997 to April 2005 earn a variable rate.
  • How You Buy Them
    • Paper bonds (1980–2012) were sold at half face value.
    • All bonds issued after 2012 must are electronic only and  sold at full face value.
  • How Interest Accrues
    • Interest builds over time, not paid out regularly.
    • You can defer taxes until redemption or choose to report the accrued interest yearly.  If you choose this method, you must keep very good records.

Tax Reporting Options

  • Report Annually:
    You can elect to report accrued interest each year, but once you choose, you must continue.
  • Defer Until Redemption or Maturity:
    • Most people wait to report interest until the bond is cashed or matures (up to 30 years).
  • Redemption Rules:
    • Minimum holding period: 1 year.
    • 3-month interest penalty if redeemed before 5 years.
    • Interest stops accruing after 30 years; taxes must be reported then.

Understanding Series I Bonds: How They Work

  • Combine a fixed rate (locked in for life) with an inflation rate (adjusted twice a year).
  • Issued at face value (e.g., pay $100 for a $100 bond).

Tax Reporting: Same Options as EE Bonds

  • Defer or report annually.
  • Reversing your choice requires following IRS protocol.

Education-Related Tax Benefits

You may exclude bond interest from federal tax if:

  • You cash the bonds and use the proceeds to pay for qualified higher education expenses in the same year as you claim the exclusion,
  • The expenses were for yourself, your spouse or someone you list as a dependent on your tax return
  • You were 24 years or older before the bonds were issued,
  • You do NOT file Married Filing Separately status on your tax return, and
  • Your income is below IRS limits.

Income Limits for 2025

  • Joint filers:
    • Phaseout begins at $149,250
    • Fully phased out at $179,250
  • All others:
    • Phaseout begins at $99,500
    • Fully phased out at $114,500

Additional Tax Notes

  • Federal Tax: Yes
  • State and Local Tax: No, these bonds are exempt from state and local taxes.

FAQs- Taxes & Savings Bonds

  1. Can I avoid paying taxes on savings bond interest?
    Yes, if the interest is used for qualified education expenses and you meet the income limits and other restrictions listed above.
  2. When should I cash in my savings bond?
    Consider cashing it in after 30 years (when it stops earning interest) or in a year when your income is low.
  3. Should I choose to report interest annually?
    It depends. Annual reporting could help reduce the overall tax impact—but it requires careful record-keeping and consistency.