Skip to Content

US Savings Bonds and Taxes

Millions of Americans own U.S. savings bonds. They are the perfect gift for a newborn and young children you want to teach habits of thrift. U.S. savings bonds also get special tax treatment and can be used as a higher education funding tool for some taxpayers. We will focus on the tax benefits of Series EE, Series HH and Series I savings bonds in this article. 

We will start with the basics of each series of bond followed by tax benefits and potential tax pitfalls surrounding savings bond ownership. A savings bond calculator is provided at the end of this post so you can find the current value of U.S. savings bonds you currently own.


U.S. Savings Bond Basics

Series EE Savings Bonds

Paper EE bonds were issued at a discount. Example: a $50 face value bond was purchased for $25. Paper EE savings bonds are no longer issued, but continue to accrue interest for 30 year from the issue date.

Electronic EE bonds are purchased in any amount $25 and over and are issued at face value. Example: A $50 bond is purchased for $50. Interest accrues from the face value.

Interest is tax-free at the state or local level, but taxed on the federal level. Interest is not taxable until the year redeemed.

Taxpayer can elect to pay taxes on the interest as it accrues. If the election is made it applies to all EE bonds currently owned and EE bonds purchased in the future. Accrued interest is reported the year of the election. The election must be made on a timely filed return (Rev. Rul. 55-655). The election can be revoked by attaching a statement to the return the year of revocation.

EE bond interest used to pay college tuition may be tax-free (details below under Tax Strategies).

EE bonds purchased between April 30, 1997 and May 1, 2005 earn interest at 90% of the average yields of the 5-year Treasury notes for the preceding six months. Interest accrues monthly (the value of the bond increases each month) and interest compounds semiannually. If the bond does not reach face value in 17 years a one-time adjustment is made to bring the bond’s redemption value to the face value.

EE bonds issued after April 30, 2005 earn a fixed rate of interest. The rate is outlined on the issue date and is fixed for at least 20 years. The price is guaranteed to double (reach the maturity price) in 20 years or the bond is adjusted accordingly. There is a 3-month interest penalty for bonds held less than 5 years.

If the EE bond owner dies there are two ways to report the deferred interest:

  1. Include the accrued interest on the owner’s personal tax return — called the decedent return. Beneficiaries pay tax on interest accrued after death.
  2. All the interest is taxed by the beneficiary when redeemed or, if elected, as it accrues annually.

Series HH Savings Bonds

The U.S. Treasury has discontinued issuing HH bonds after August 31, 2004. 

HH bonds:

  • Were issued at face value.
  • Paid a fixed interest rate semiannually.
  • Are subject to federal income tax.
  • Are not subject to state and local income taxes.
  • Were only issued in exchange for Series E and EE savings bonds.
  • The accrued interest from the E or EE bonds was deferred until the HH bonds matured, but
  • The interest on the HH bond itself cannot be deferred.


Series I Savings Bonds

Series I paper bonds come in 5 denominations ($50, $100, $200, $500, $1,000 and $5,000) and you can use your federal income tax refund to purchase them.

Electronic I bonds are available in any amount $25 and over. Purchases can be made via Treasury Direct

Are issued at face value. All interest is paid at redemption or maturity.

The interest rate contains two components:

  1. A fixed rate of interest effective for the life of the bond, and
  2. A semiannual inflation rate that is based on the Consumer Price Index for all Urban consumers (CPI-U). 

Interest is added each month and compounds semiannually. 

Once again, interest is subject to the federal income tax, but is not included in income on the state and local level. Federal income tax is due when either the bond matures or is redeemed. Cash basis taxpayers can elect to pay taxes as the interest accrues using the same rules as for Series EE bonds (where interest is taxed annually) [IRC Sec. 454(a)].

Interest used to pay college tuition may be excluded from income. See Tax Strategies below.


Tax Strategies

In a world of low interest rates, U.S. savings bonds can be a powerful option with tax advantages. Not only can you earn a higher rate of return on your emergency funds, but the interest is excluded from income tax on the state and local level.

You also have the option of paying the federal tax on the interest when you redeem the bond or when it matures, OR you can elect to pay as you go. Your personal tax situation will dictate which method affords the lowest tax over all years involved.

I have included two charts in this post: How Long Bonds Earn Interest and Who reports Interest on U.S. Savings Bonds.

The first chart is important because savings bonds have an interest-bearing life. No interest will accrue or be paid after the stated number of years. Interest accrued during the interest-bearing years is not lost even if the bond is held longer than the interest-bearing life term.

The second chart helps you navigate the tricky rules for who reports the income on their federal income tax return. 

If you buy a bond for a grandchild (or any other person for that matter) the interest is reportable by that person unless the bonds are not titled in their name. 

The interest from bonds bought in the name of co-owners (as bonds for children are usually purchased) is reported on the federal income tax return of the co-owner whose funds were used to purchase the bond, even if the other co-owner cashes in the bond and keeps all the proceeds. 

Gifting: Gifting a savings bond prior to maturity accelerates accrued interest. Prior unreported interest is reported in the year the bond is gifted. The bonds need to be reissued into the transferee’s name.

Charitable Contribution: If you donate a savings bond to a charity the interest accrued needs to be included in your federal income. The value of the bond is then included with your other charitable contributions on Schedule A.

Higher Education: The interest on EE and I bonds can be tax-free when used for higher education. there are some rules that need to be followed:

  • The bonds must have been purchased after 1989 by people 24 years of age or older on the first day of the month the bond was purchased.
  • The bonds redeemed must be used for undergraduate, graduate or vocational school tuition and fees (Example: lab fees) for the taxpayer, spouse or dependent.
  • Tuition must be paid in the year the savings bonds are redeemed.
  • Room and board costs and books are not eligible expenses.
  • Qualified education expenses are reduced for tax-free portions of scholarships and other forms of tax-free tuition assistance. Education credits on your tax return also might be reduced. 
  • The bonds must be in the taxpayer’s name, not the dependent (child).
  • Grandparents can only use this tax break if they can claim the grandchild on their tax return as a dependent.
  • Income limits apply. For 2021: Joint returns begin phasing out the education exclusion of U.S. savings bond interest when modified adjusted gross income (MAGI) exceeds $124,800 and is completely phased out at $154,800. Everyone else begins to phase out the exclusion when MAGI exceeds $83,200 and completely phases out at $98,200.
  • Claim the exclusion on Form 8815.
  • Compare the various strategies for tax benefits regarding education expenses. 529 plans, tax credits (American Opportunity Credit or Lifetime Learning Credit) and Coverdell ESAs all play a role. The savings bond interest exclusion is a last line of defense when prior planning has been lacking or when personal facts and circumstances recommend that course of action. 


You can use the savings bond calculator  below to determine the current value of paper bonds. 

U.S. Savings Bond Calculator

Log in to your Treasury Direct account for the current value of electronic bonds.


More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.


Saturday 10th of July 2021

i still have EE bonds from the early 90s, earning 4%. about to hit the 30-year mark, sigh. These were my 'emergency' stash. I was co-owner with my father, who pretty much used these bonds as his savings/investment vehicle as a war refugee.