Ask the Tax Editor, July 24: Taxation of I Bonds

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four tax questions from readers on the taxation of I bonds in various situations. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Buying and owning I bonds

Question: I am thinking about buying I bonds for the first time. I heard that holders of I bonds get generous tax breaks. What are the tax consequences of owning these bonds?

Joy Taylor: I bond buyers have a choice when they acquire the savings 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.

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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 tax bill even more expensive than it needed to be.

Interest earned on I bonds is exempt from state and local taxation.

2. Gifting an I bond you own

Question: I own about 50 I bonds that will begin to mature in 2030. I elected to defer taxation of the bonds' accrued interest until maturity. I am considering giving some of the I bonds to my grandchildren before they mature. If I do this, can I avoid paying federal income tax on the deferred interest?

Joy Taylor: Nope, this will not work taxwise. Making a gift of 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 tax on previously untaxed interest. Even 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.

3. I bonds used for education

Question: I have owned I bonds for many years. I heard that if I cash in the bonds and use the bond proceeds for higher education for my children, then I won’t have to pay tax on the interest when I cash them in. Is this true?

Joy Taylor: It depends on whether you meet all of the rules. One way to avoid paying federal income tax on accrued I bond interest is to cash in the bonds on or before the maturity date and use the proceeds to help pay for college or other higher education expenses for you, your spouse or your dependent. Note that there are lots of hurdles to jump over to be able to take advantage of this tax perk. Here are some of them:

• 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 cannot use this tax break to help pay for their grandchild’s college tuition unless the grandparents can, on their Form 1040, claim the grandkid as a dependent).
• Room-and-board costs aren’t eligible for the exclusion.
• The exclusion is subject to strict income limits. For 2026, it begins to phase out at modified adjusted gross income (MAGI) of more than $152,650 for joint filers and completely phases out at MAGI of $182,650. For all other filers, the phase-out range for 2026 is $101,800 - $116,800. These figures are adjusted for inflation each year, so they would be higher for 2027 and so forth. MAGI for this purpose starts with the AGI on line 11 of your Form 1040 (figured without taking into account any I-bond interest exclusion). Then you add back any tax breaks from working abroad, the exclusion for employer-provided adoption assistance and any deductions for student loan interest.

If the proceeds from all I bonds cashed in during the year exceed the qualified education expenses that you pay for the year, the amount of I bond interest you can exclude is reduced proportionally. You would use IRS Form 8815 to compute your MAGI and the amount of any I-bond interest exclusion that you would be entitled to.

4. Inherited I bonds

Question: I inherited I bonds this year from my father, who recently passed away. It is my understanding that my dad elected to defer being taxed each year on the I bonds during his lifetime. Do I have to report all the accrued, deferred interest on my federal tax return?

Joy Taylor: It depends. The executor of a 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 postdeath 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, whichever is earlier.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

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• Ask the Editor: 10-Year Rule for Inherited IRAs
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