How Are I Bonds Taxed? Nine Common Situations

Taxes when you buy I Bonds for yourself

I bond buyers have a choice when they acquire the bonds. They can pay federal income tax each year on the interest earned or defer the tax bill to the end. Most people choose the latter. They report the interest income on their Form 1040 for the year the bonds mature (generally, 30 years) or when they're cashed in, whichever comes first.

However, deferring tax on the full amount of accrued interest for up to 30 years may sound like a great idea until you get the tax bill for three decades worth of interest. Also, taking the tax hit all at once can push you into a higher federal income tax bracket, making the bill even more expensive than it needed to be.

Gifting I Bonds: Tax rules when buying for others

Savings bonds make great gifts. But if you buy I bonds for someone else, such as your children, grandchildren or any other person, the interest is reportable by that person, provided the bonds are titled in his or her name.

Just like any other holder of I bonds, the recipient can choose to defer paying tax on the interest until the earlier of the year the bonds mature or are cashed in, or he or she can report the interest annually.

Tax implications of co-owned I Bonds

For I bonds issued in the name of co-owners, such as a parent and child or grandparent and grandchild, the interest is generally taxable to the co-owner whose funds were used to buy the bonds.

However, that co-owner can choose to defer paying tax on the interest or report it annually. This is true even if the other co-owner redeems the bonds and keeps all the proceeds.

How to report and pay taxes when you cash in I Bonds

If you cashed in I bonds last year, you must report the interest on line 2b of your 2024 Form 1040 and pay tax to the extent you didn't otherwise include the interest income in a prior year. The same reporting would be applicable for I bonds that you cash in during 2025.

If you received $1,500 or more in interest during the year, you would also have to fill out Schedule B and attach it to your tax return.

If you used the bond proceeds to pay for higher education, some of the interest may be exempt (see below).

Holding I Bonds until maturity

If you keep the I bonds through the date they mature, generally 30 years, and you didn’t otherwise include the interest income in a prior year, you will be taxed on all the accrued but previously untaxed interest in the year of maturity, whether or not you cash them in.

You would report the interest on line 2b of Form 1040 and attach Schedule B if you earned $1,500 or more of interest.

If you cash the bonds in during the year they mature, and you use the proceeds to pay for higher education, some of the interest may be exempt (see below).

How to use I Bonds for education

One way to avoid paying federal income tax on accrued I bond interest is to cash in the bonds before or on the maturity date and use the proceeds to help pay for college or other higher education expenses for you, your spouse or your dependent. But there are lots of rules and hurdles to jump over to be able to take advantage of this tax perk. For instance:

• You must have purchased the bonds after 1989 when you were at least 24 years old;
• The bonds must be in your name only;
• The bonds must be redeemed to pay for undergraduate, graduate or vocational school tuition and fees for you, your spouse, or your dependent;
• Grandparents can't use this tax break to help pay for their grandchild's college tuition unless the grandparent can, on their 1040, claim the grandkid as a dependent;
• Room and board costs aren't eligible for the exclusion; and
• The exclusion is subject to strict income limits. For 2024, it begins to phase out at modified adjusted gross income of more than $145,200 for joint filers and $96,800 for others. For 2025, it begins to phase out at modified adjusted gross income of more than $149,250 for joint filers and $99,500 for others.

If the proceeds from all savings bonds cashed in during the year exceed the qualified education expenses paid that year, the amount of interest you can exclude is reduced proportionally.

Use IRS Schedule B and Form 8815 to report and calculate any excluded I bond interest used for education.

Gifting I Bonds you own

Gifting an I bond before maturity will accelerate taxation of the interest income. Giving away bonds you already own to someone else doesn't get you off the hook with the federal government for owing money on previously untaxed interest.

If the bonds are reissued in the gift recipient's name, you're still taxed on all that interest in the year of the gift.

Donating I Bonds to charity

Donating an I bond before it matures to charity while you're alive will also accelerate taxation of the interest income.

As with gifts to other people, giving away bonds you already own to your alma mater, favorite museum or other charitable organization doesn't let you avoid the tax on previously untaxed interest. You're still taxed on all that interest in the year the donation is made.

Inheriting I Bonds

If you inherit I bonds that haven't yet matured, who is taxed on the accrued interest that went untaxed because the original owner deferred the interest? It depends.

The executor of the decedent's estate can choose to include all pre-death interest earned on the bonds on the decedent's final income tax return. If this is done, the beneficiary reports only post-death interest on Form 1040 for the year the bonds mature or are redeemed, whichever comes first.

If the executor doesn't include the interest income on the deceased owner's final federal income tax return, the beneficiary will owe taxes on all pre-death and post-death interest once the bond matures or is redeemed, again whichever is earlier.

Related

• Bond Basics: Investing
• How are Inherited EE or I Savings Bonds Taxed?
• What's the 2024 Gift Tax Limit?
• Types of Income the IRS Doesn't Tax