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U.S. Savings Bonds

Series E and EE U.S. savings bonds are issued at a discount. The interest is “paid” at maturity when the bonds are redeemed for their full face value. Each year the bond is outstanding, its redemption value increases, with the annual increase in value representing the “interest accrual” for each year. Cash basis taxpayers generally report the interest earned on Series E and EE bonds in the year the bonds are redeemed or mature.

Series I U.S. Savings bonds combine the features of deferring taxes on the  interest until maturity with inflation-protected growth. Series I bonds are issued at face value and pay a fixed interest rate plus a semi-annual inflation adjusted rate. Interest is added to the  bond monthly and paid when the bond is redeemed. Like Series E and EE bonds, cash-basis individuals generally report interest on Series I bonds in the year of maturity (or year redeemed, if earlier).

Election to report interest each year.

Taxpayers can elect to report interest on the accrual method (that is, as earned) for Series E, Series EE and Series I savings bonds [IRC §454(a) and (c)]. If made, the election applies to all U.S. savings bonds owned in the year of election and to savings bonds subsequently acquired. Furthermore, in the year of election, the taxpayer must report all income accrued on the bonds from the acquisition date. The election is made by attaching a statement, such as the following, to the taxpayer’s return for the year it is effective. [Reg. §1.454-1(a)]

Election to Accrue Interest on U.S. Savings Bonds

The taxpayer hereby elects under Section 454 of the Internal Revenue Code to currently recognize as income the increment in the periodic redemption price over original purchase price of U.S. savings bonds described in Regulation Section 1.454-1(a)(1) that were owned as of January 1, [year], or that are acquired after that date.

Plan: If a child’s investment income will not be subject to the kiddie tax because it is less than the threshold ($1,900 for 2010), or the child is no longer subject to the kiddie tax, it may be advantageous to elect to accrue interest income on savings bonds to take advantage of the child’s lower tax rate and annual standard deduction.

Taxpayers can revoke an election to accrue interest on U.S. savings bonds, thereby allowing them to return to the cash method for reporting interest income. To obtain automatic IRS consent to return to the cash method, attach a statement such as the following to the tax return for the year of change. Revoking the election may be appropriate when income recognized under the accrual method is subject to the kiddie tax.

Tip: Interest on certain Series EE and I bonds is excluded from income if the bond proceeds are used to pay qualified higher education expenses

Helpful Links

  • VISIT THE U.S. SAVINGS BONDS WEB SITE FOR ALL KINDS OF DETAILS ON SERIES EE AND I BONDS, INTEREST RATES, TAX CONSIDERATIONS AND FREQUENTLY ASKED QUESTIONS.
  • GO TO EASYSAVER TO LEARN MORE ABOUT THIS SAFE AND CONVENIENT WAY TO AUTOMATICALLY PURCHASE U.S. SAVINGS BONDS WITH AN ELECTRONIC DEBIT FROM YOUR CHECKING OR SAVINGS ACCOUNT.
  • FIND THE CURRENT VALUE OF ONE OR MANY SAVINGS BONDS USING THE SAVINGS BOND CALCULATOR.
  • CHECK OUT THE NEWEST WAY TO PURCHASE AND HOLD SERIES I BONDS DIRECTLY WITH THE U.S. TREASURY IN ANONLINE ACCOUNT.
  • SEE OUR FUN CALCULATORS THAT CAN SHOW YOU HOW YOUR SAVINGS CAN GROW, HOW TAX ADVANTAGES OF BONDS BENEFIT YOU AND HOW TO PLAN FOR A SAVINGS GOAL.
  • DOWNLOAD THE SAVINGS BONDS WIZARD, A FREE SOFTWARE PROGRAM THAT HELPS YOU MAINTAIN AN INVENTORY OF YOUR BONDS. YOU CAN ALWAYS SEE THE CURRENT VALUE OF YOUR HOLDINGS AND PRINT A COPY OF THE INVENTORY TO KEEP IN A SAFE PLACE SEPARATE FROM YOUR BONDS.

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