What Taxes Apply to Earnings from Savings Bonds?
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What Taxes Apply to Earnings from Savings Bonds?
While savings bonds typically do not earn high interest, the low interest rate is sometimes compensated by favorable tax terms. Remember, you can use the money you do not spend on taxes to purchase an item you want or to invest in other instruments.
Things To Know
- You don’t pay state or local taxes on the earnings of any savings bonds.
- Buying the bonds in your child’s name can get you a lower tax rate.
- The Education Bond Program exempts your earnings from federal tax if you redeem the bonds for qualified education expenses.
Savings bonds have tax advantages
What specifically are the tax advantages? For starters, you do not pay any state or local taxes on the earnings of any savings bonds you own—ever. While you must pay federal taxes on the earnings of Series HH bonds in the year that you receive the interest, you can defer earnings and taxes on Series E, EE, and I bonds for long periods.
Remember, you can hold Series EE and I bonds for 30 years, at which time they mature. HH bonds mature after 20 years. Upon maturity, you must redeem your EE or HH bonds and finally pay any taxes owed on the earnings. Note: Series HH/H bonds have no longer been available for sale or exchange since August 2004.
If you buy bonds in your child’s name
If you buy Series EE or Series I bonds in the name of your child and redeem the bonds while the child is still your dependent, you will pay taxes on the earnings at the child’s rate. The child’s rate may be 0 percent if the child’s total income is below that year’s taxable threshold; in any case, it is probably less than your tax rate.
If you participate in the Education Bond Program
In 1990, the Treasury department established the Education Bond Program, which exempts savings bond earnings from federal tax if the bonds are redeemed to pay for qualified education expenses. To qualify for this program, you must be 24 or older when buying the bonds. You then must redeem your bonds and document tuition and certain other education-related expenses (room, board, and books are not qualified). If the value of the bonds redeemed is greater than the qualified expenses, only the proportion used for qualified expenses is tax-free.
The exclusion, which phases out as income rises, is also only available to single taxpayers with annual modified adjusted gross incomes that meet the thresholds below:
Within these limits, the exclusion is gradually phased out. You can find more information about the program on IRS Form 8815 and at the Savings Bonds for Education Website).
The tax advantages of savings bonds can offset their generally low returns, so that savings bonds can form a valuable portion of your investment portfolio.
