Investors looking for a safe and secure investment may decide to purchase U.S. savings bonds. Issued by the U.S. Treasury Department, the U.S. government backs both the principal and interest earned from the initial principal. As you consider your investment, remember that you must pay taxes on cashed-in bonds. Because the financial institution that cashes your bond reports the interest earned directly to the Internal Revenue Service, you may face penalties for unreported investment income if you do not pay the taxes correctly.
1. Locate IRS Form 1099-INT. You should receive this form from the financial institution when you cash in the bond, or the institution will mail it to you at the end of the tax year. If you received the form when you cashed the bond, file it with your other tax documents so you can retrieve the information before you fill out your income tax forms.
2. Find the figure in box 3 of the 1099-INT. This figure is the interest you earned during the tax year after cashing in the U.S. bonds.
3. Add the figure from box 3 of form 1099-INT to any other interest income. Transfer this figure to line 8a of tax return forms 1040 and 1040a.
- If the earned interest was less than $10, the IRS does not require the financial institution to issue a 1099-INT. In this case, you still have an obligation to report the interest income, but you must find the interest income amount you earned by checking the paperwork you received when you cashed the bond.
- Most investors choose the cash method to pay interest income on bonds -- meaning you pay no taxes on the interest income until you cash a bond. If you choose the accrual method, you pay tax on the interest earned each year as a bond matures. Be careful not to pay tax on the interest twice if you use the accrual method, because you will receive a 1099-INT when you cash the bond. However, the 1099-INT will not reflect the taxes you have already paid. In this case, you must adjust the amount you owe by subtracting the interest you already paid.
- Comstock/Comstock/Getty Images