When you cash in your Series EE or Series I savings bonds, you may have to pay federal income tax on the interest you’ve earned. The amount of tax you owe depends on how long you’ve held the bonds and your tax bracket. If you cash in the bonds after holding them for less than a year, you’ll have to pay taxes on all of the interest you’ve earned. If you cash them in after holding them for more than a year, you’ll only have to pay taxes on the interest that has accrued since you bought them. You can also choose to defer paying taxes on the interest until you cash in the bonds or they reach maturity.
Savings Bonds and Federal Taxes
When you decide to cash in your savings bonds, it’s essential to know the tax implications. Here’s what you need to know about federal income tax on savings bonds:
Tax Treatment of Savings Bonds
- Series EE and I bonds: Interest on these bonds is tax-deferred until you cash in the bonds or they mature.
- Series H and HH bonds: Interest is paid semiannually and taxed as ordinary income.
Federal Income Tax on Cashed-In Savings Bonds
When you cash in Series EE or I savings bonds, you owe federal income tax on the total amount of interest earned. However, you may be able to exclude part or all of the interest from your taxable income if:
- You used the proceeds to pay for eligible education expenses.
- You meet specific income limits.
Tax Table for Series EE and I Bonds
| Filing Status | Modified Adjusted Gross Income | Tax Treatment |
|---|---|---|
| Single | Up to $40,000 | Interest fully excludable |
| Over $40,000 | Interest fully taxable | |
| Married Filing Jointly | Up to $60,000 | Interest fully excludable |
| Over $60,000 | Interest fully taxable | |
| Married Filing Separately | Up to $30,000 | Interest fully excludable |
| Over $30,000 | Interest fully taxable | |
| Head of Household | Up to $50,000 | Interest fully excludable |
| Over $50,000 | Interest fully taxable |
When Are Savings Bond Earnings Taxed?
Savings bond earnings are subject to federal income tax at the time they are redeemed, or cashed in. The bond’s issue date and maturity date determine when taxes are due.
EE bonds and I bonds are accrual bonds, meaning that interest earned is reported on your tax return each year, regardless of whether you cash the bond. You can choose to pay the taxes each year or defer them until the bond matures or is cashed.
Series E and H bonds are non-accrual bonds, meaning that interest is not reported on your tax return until the bond matures or is cashed. You pay taxes on the full amount of interest earned in the year you redeem the bond.
State and Local Taxes on Savings Bonds
Some states and localities may also impose income taxes on savings bond earnings. The following table summarizes the state and local tax treatment of savings bond earnings:
| State | Local Taxes |
|---|---|
| Alabama | None |
| Alaska | None |
| Arizona | None |
| Arkansas | None |
| California | None |
| Colorado | None |
| Connecticut | None |
| Delaware | None |
| District of Columbia | None |
| Florida | None |
| Georgia | None |
| Hawaii | None |
| Idaho | None |
| Illinois | None |
| Indiana | None |
| Iowa | None |
| Kansas | None |
| Kentucky | None |
| Louisiana | None |
| Maine | None |
| Maryland | None |
| Massachusetts | None |
| Michigan | None |
| Minnesota | None |
| Mississippi | None |
| Missouri | None |
| Montana | None |
| Nebraska | None |
| Nevada | None |
| New Hampshire | None |
| New Jersey | None |
| New Mexico | None |
| New York | None |
| North Carolina | None |
| North Dakota | None |
| Ohio | None |
| Oklahoma | None |
| Oregon | None |
| Pennsylvania | None |
| Rhode Island | None |
| South Carolina | None |
| South Dakota | None |
| Tennessee | None |
| Texas | None |
| Utah | None |
| Vermont | None |
| Virginia | None |
| Washington | None |
| West Virginia | None |
| Wisconsin | None |
| Wyoming | None |
Tax Implications of Cashing in Savings Bonds
Cashing in savings bonds can have tax implications, as the interest earned on these bonds is subject to federal income tax. However, there are certain conditions that may allow you to avoid paying taxes on your savings bond earnings.
- Cashing in bonds held for more than one year: If you cash in savings bonds that you have held for more than one year, you will only pay taxes on the interest earned in the last year.
- Cashing in bonds to pay for qualified education expenses: If you cash in savings bonds to pay for qualified education expenses, you may be eligible for a tax exemption on the interest earned.
- Cashing in bonds after reaching age 70½: If you cash in savings bonds after reaching age 70½, you may be eligible for a reduced tax rate on the interest earned.
The following table summarizes the tax implications of cashing in savings bonds, depending on the age of the bond and the reason for cashing in:
| Age of bond | Reason for cashing in | Tax implications |
|---|---|---|
| Held for more than one year | Any reason | Pay taxes on interest earned in the last year |
| Held for less than one year | Any reason | Pay taxes on all interest earned |
| Any age | To pay for qualified education expenses | May be eligible for a tax exemption on the interest earned |
| Age 70½ or older | Any reason | May be eligible for a reduced tax rate on the interest earned |
It is important to note that the tax implications of cashing in savings bonds can vary depending on your individual circumstances. It is recommended that you consult with a tax professional to determine the potential tax implications of cashing in your savings bonds.
Well, there you have it, folks! Whether you’re a seasoned saver or new to the bond game, now you know the scoop on taxes and savings bonds. So, happy caching and investing! Thanks for hanging out with me today. Feel free to bookmark this page for future reference, and swing by again any time for more money-saving tips and financial insights. Until next time, keep your finances on track and conquer those wealth-building goals!