Series EE and Series I savings bonds are popular investment vehicles due to their tax advantages and relatively low risk.
Series EE and Series I bonds are subject to federal income tax but are exempt from state and local income taxes. They may also be subject to federal estate, gift, and excise taxes, as well as state estate or inheritance taxes. Using the bonds for higher education expenses can potentially exempt you from federal income tax on the interest earned.
Interest accumulation:
Refer to TreasuryDirect article for updated guidelines.
Most investors defer reporting interest until they cash the bond or it matures. You receive a Form 1099-INT for the year in which you receive the interest. Example: If you cash a bond in 2024, you will receive a 1099-INT by January 31, 2025.
You can choose to report interest each year, which might be beneficial if the bond is in a child’s name who is in a lower tax bracket. Since no 1099-INT is issued annually, you must calculate the interest yourself. If you report interest annually, you will need to refer to IRS Pub. 550 to inform the IRS that you have already reported some or all of the interest when you eventually receive the 1099-INT.
Accessing 1099-INT:
Log in to your account, select the ManageDirect tab. Under “Manage My Taxes”, choose the relevant year and view your 1099-INT.
1099-INT issued when bond is cashed or matures. Reported under the owner’s Social Security Number.
To calculating interest use the Savings Bond Calculator for paper bonds. For electronic bonds, view interest in your TreasuryDirect account.
No IRS permission required. You must report all accrued interest up to the change year. If you switch in 2024, report all interest accrued from the bond’s purchase date to 2024.
Requires Form 3115 or following instructions in IRS Pub. 550. Example: If you switch in 2024, you need to file Form 3115 to change your accounting method.
Educational tax exclusions under IRC §135, “Income from United States savings bonds used to pay higher education tuition and fees” allow you to cash in U.S. savings bonds tax-free if the proceeds are used for qualified higher education expenses. This strategy can effectively reduce your taxable income while funding education. Details are outlined in IRS Pub. 970, “Tax Benefits for Education”.
To qualify for the educational tax exclusion on U.S. savings bonds, you must meet the following conditions:
You must use the bond proceeds to pay for qualified education expenses for yourself, your spouse, or a dependent. Qualified expenses include tuition and fees required for enrollment or attendance at an eligible educational institution, contributions to a qualified tuition program (QTP), and contributions to a Coverdell education savings account (ESA). Expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate-granting program are excluded.
The exclusion begins to phase out once your MAGI exceeds $96,800 if single or $145,200 if married filing jointly (2024 figures; these thresholds are adjusted for inflation each year).
Your filing status must not be married filing separately.
Only Series EE bonds issued after 1989 or Series I bonds qualify. The bonds must be issued in your name (as the sole owner) or in the name of both you and your spouse (as co-owners). The owner must be at least 24 years old before the bond’s issue date.
Adjusted Qualified Education Expenses (AQEE) Your qualified education expenses must be reduced by any tax-free benefits you receive, such as:
Any tax-free scholarships or grants you receive must be subtracted from your total qualified education expenses.
Any educational assistance provided by your employer that is tax-free must also be deducted.
Any other tax-free payments received for educational expenses must be subtracted.
Reporting Requirements Report the exclusion on Form 8815, “Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989”. Attach this form to your Form 1040.
Example. In February 2023, a married couple cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. In 2023, they paid $7,650 of their child’s college tuition. They aren’t claiming an American opportunity or lifetime learning credit for those expenses, and their child doesn’t have any tax-free educational assistance. Their MAGI for 2023 was $90,000.
They can exclude $2,550 of interest in 2023. They must pay tax on the remaining $450 of interest.