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How Series EE Savings Bonds are Taxed

Parents and relatives often purchase Series E and Series EE savings bonds for their kids and as financial gifts for younger family members. In fact, most owners rarely look at them or even think about them except on occasional trips to a file cabinet or safe deposit box.

One of the main reasons for buying U.S. savings bonds (such as Series EE bonds) is the fact that interest can build up without the need to currently report or pay tax on it. The accrued interest is added to the redemption value of the bond and is paid when the bond is eventually cashed in. However, the law doesn’t allow for this tax-free buildup to continue indefinitely. The difference between the bond’s purchase price and its total redemption value is all considered taxable interest.

The Series EE bonds have a maturity period of 30 years and were first offered in January 1980. They were in replacement for the earlier Series E bonds. Be aware that Series EE bonds can still be purchased but are currently only issued electronically. They’re issued at face value, and the face value plus accrued interest is payable at maturity.

Before January 1, 2012, Series EE bonds could be purchased on paper. Those paper bonds were issued at a discount, and their face value is payable at maturity. They were usually purchased at 50% of their value and at least doubled in their maturity. Owners of paper Series EE bonds can convert them to electronic bonds, posted at their purchase price (with accrued interest).

Example of how Series EE bonds are taxed

Bonds issued in January 1990 reached final maturity after 30 years, in January of 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest was taxable in 2020. So, a $1,000 Series EE bond (paper) bought in January 1990 for $500 was worth about $2,073.60 in January of 2020. It won’t increase in value after that. The entire difference of $1,573.60 ($2,073.60 − $500) was taxable as interest in 2020.

The interest is only taxable for federal income tax and is exempt from state and local income taxes. Interest is not taxable until the year in which the bonds mature or the year in which the bonds are redeemed. In the year in which the bonds are redeemed the owner will receive a 1099-INT.

Using the money from EE bonds for higher education may keep you from paying federal income tax on the interest

The money from EE bonds that are used for college tuition may be tax-free if used for qualified expenses. Qualified expenses are tuition and fees for the owner of the bond, their dependents, or spouses at a qualifying educational institution. Qualified expenses can include contributions to a qualified tuition program (QTP) or an education savings account (ESA).

If you own bonds (paper or electronic) that are reaching final maturity this year, action is needed to assure that there’s no loss of interest or unanticipated current tax consequences. The main item that you will want to check on is the issue dates of the bonds along with any listed maturity dates. One possible place to reinvest the money is in Series I savings bonds, which are currently attractive due to rising inflation resulting in a higher interest rate.  Please reach out to your Wegner tax specialist if you have tax questions as you cash in your savings bonds.

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