U.S. savings bonds earn interest that can be allowed to accrue tax deferred until you choose to redeem a bond. In ordinary circumstances, when a savings bond is cashed, taxes will be due on the total amount of interest earned by the bond. An option exists to pay the taxes as interest is earned rather than paying on the lump sum received at redemption.
Savings Bond Function
The U.S. Treasury currently issues two forms of savings bonds, series EE and series I bonds. Series EE bonds earn a fixed rate of interest and series I bonds earn a variable rate based on the current rate of inflation. Interest is credited monthly and adds to the value of a bond. Savings bonds will continue to earn interest for up to 30 years after issue. The only way to withdraw money from a savings bond is to fully redeem the bond.
Tax Reporting Choices
The Treasury Direct website states bond owners can report interest earnings for tax purposes using one of two methods. The cash reporting method requires a bond investor to report the interest earned on a bond when the bond is redeemed. This method defers taxes while a bond is earning interest. The accrual reporting choice requires savings bond owners to report the interest earned each year on the bond owner's income tax return. With this method, the taxes due on a bond's interest earnings would be spread over the years a bond is owned.
Strict Accrual Rules
A savings bond owner who desires to report bond interest using accrual reporting must do so starting with the year the bond is purchased and continue the reporting each year. Also, a bond owner who elects accrual reporting must use this method to declare interest earnings on every savings bond the individual currently owns or purchases in the future. Once a savings bond owner starts to report interest on an annual basis, he must continue the annual reporting for as long as he owns any savings bonds.
Annual Interest Earnings
The bond owner who elects to report interest each year must manually look up the amount of interest earned on each bond she owns. The Treasury does not send out 1099 forms for unredeemed savings bonds. The interest earnings for the year can be found using the savings bond calculator on the Treasury Direct website. If December is entered as the Value as Of date, the calculator will show the amount of interest earned by the bond for the full year.
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