If you hold savings bonds and redeem them with interest earned, that interest is subject to federal income tax and federal gift taxes. You won’t pay state or local income tax on interest earnings but you may pay state or inheritance taxes if those apply where you live.
Which savings bonds are tax exempt?
Savings bonds are exempt from taxation by any State or political subdivision of a State, except for estate or inheritance taxes. Interest earnings are subject to Federal income tax. Interest earnings may be excluded from Federal income tax when bonds are used to finance education (see education tax exclusions).
Are savings bonds taxed as capital gains?
U.S. savings bonds appeal to investors who want a guaranteed return. Unlike a share of stock or interest in real estate, the money you earn on savings bonds counts as regular income, not capital gains. The interest becomes part of your gross income, taxed at your regular tax rate.
Do EE bonds stop earning interest?
EE bonds earn interest until they reach 30 years or until you cash them, whichever comes first. You can cash them after 1 year. But if you cash them before 5 years, you lose the last 3 months’ interest. (For example, if you cash an EE bond after 18 months, you get the first 15 months of interest.)
What kind of tax do you pay on savings bonds?
Interest earnings on bonds are reported on IRS Form 1099-INT. It’s important to keep in mind that savings bond interest is subject to more than one type of tax. If you hold savings bonds and redeem them with interest earned, that interest is subject to federal income tax and federal gift taxes.
Is the interest on Series E savings bond tax free?
Series E and EE savings bonds are also state and local tax free, however their interest income may be deferred until maturity.
How are savings bonds reported to the IRS?
With electronic Series EE bonds, the redemption process is automatic and interest is reported to the IRS. Interest earnings on bonds are reported on IRS Form 1099-INT. It’s important to keep in mind that savings bond interest is subject to more than one type of tax.
Why are tax free bonds better than taxable bonds?
Tax free bonds such as municipal bonds generate income which is tax free and thus result in the paying of lower interest rates than taxable bonds. A fixed rate of interest is supposed to be paid for most of the municipal bonds.