Tax rules for Series EE savings bonds

Series EE savings bond

If you have a Series EE savings bond, you may wonder if the interest you earn on them is taxed. Many people received these bonds as gifts when they were children, or even bought them themselves and tucked them away somewhere. 

If this applies to you, you’re probably curious about what you should do to make sure that there’s no loss of interest or negative tax consequences for you when these bonds reach maturity. 

Understanding interest rates

Interest rates differ depending on bond age. Series EE Bonds dated on or after May 2005 earn a fixed rate of interest, while bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Additionally, paper Series EE bonds were sold at half their face value. If you own a paper $50 bond, that means you paid $25 for it. The catch is that the bond only becomes worth its face value once it matures. Today, the U.S. Treasury Department no longer issues EE bonds in paper form. Instead, it sells electronic Series EE Bonds at face value. These bonds are worth their full value when available for redemption.

Bonds earn interest for 30 years. The minimum ownership for these bonds is one year, but a penalty is imposed on bonds that are redeemed in the first five years. 

How interest accrues

These bonds don’t pay interest while you own them. Instead, accrued interest is realized when the bond is redeemed. Value can be determined by consulting tables issued by the U.S. Treasury that shows the redemption values.

Because interest isn’t paid annually, it isn’t taxed as it accrues unless a bond owner elects for this interest to be taxed annually. If this choice is made, all previously accrued interest is also reported and taxed in the election year. Many people avoid making this election in order to receive the benefits of tax deferral.

If a bond holder elects to have interest taxed annually, this choice will apply to all bonds and for all future years. In other words, the election cannot be made on a bond-by-bond or year-by-year basis. Elections can be canceled, however. 

If the annual tax election isn’t made, all accrued interest is taxed at the time the bond is redeemed or disposed of (unless it is exchanged for a Series HH bond). Bonds continue to accrue interest for 30 years, even after reaching its face value. After 30 years, interest stops accruing and should be reported. 

This interest isn’t subject to state income tax, and if the funds are used to pay for higher education, you may not have to pay federal income tax on interest.

Final maturity

Interest that doesn’t need to be reported annually is one of the advantages of an EE bond. This cannot continue forever, however. When the bond matures, it stops earning interest.

For series EE bonds issued in January 1990, final maturity is reached after 30 years. That means that all of the accrued and untaxed interest is taxable in 2020.

Check the issue dates on any EE bonds that you own—paper or electronic. If these bonds are no longer earning interest, it is probably time to redeem them. 

Contact us with any questions about savings bond taxation.