Savings Bond Interest and Taxes: Report Yearly or Wait?
Interest on EE and I savings bonds is subject to federal income tax but not state or local income tax, and you choose when to report it: each year as it builds up, or all at once when you cash the bond. Most people wait. Which choice is cheaper depends on one thing, whether your tax rate is likely to be the same, higher, or lower when the money is finally paid out.
1. What TreasuryDirect says is taxable
According to TreasuryDirect, savings bond interest is subject to:
- federal income tax, but not state or local income tax; and
- any federal estate, gift, and excise taxes and any state estate or inheritance taxes.
Using the money for qualifying higher education may keep you from paying federal income tax on the interest. TreasuryDirect has a separate page covering the possibilities and restrictions.
2. Why timing is a choice
EE and I bonds earn interest from the first month you own them, but you get the interest all at once. For a paper bond, that happens when you cash it. For an electronic bond, it happens when you cash it or when it matures at 30 years. Because the money is not paid out each year, the tax rules let you pick:
- Defer. Put off reporting until you file the return for the year you actually receive the interest. TreasuryDirect says most people do this.
- Report every year. You report the interest as it accrues, even though you have not received it.
3. How the paperwork differs
If you defer, you get a Form 1099-INT for the year you receive the interest. Electronic bonds in a TreasuryDirect account have the 1099-INT available in the account by January 31 of the following year. Banks that cash a paper bond must provide one as well.
If you report every year, you will not get a 1099-INT each year. You only get one at the end, and it shows all the interest the bond earned over its life. TreasuryDirect points to IRS Publication 550, the section on U.S. savings bonds, for how to tell the IRS that you already reported some or all of that interest. For electronic bonds, you can see each year's interest in your account, and for paper bonds the Savings Bond Calculator can help you figure it out.
4. A 10-year example
Take a $1,000 electronic EE bond bought at 2.40%, the rate TreasuryDirect lists for bonds issued May 1, 2026 through October 31, 2026, as of October 2026. With semiannual compounding, the value grows by a factor of 1.012 every six months:
| Year | Bond value | Interest earned that year |
|---|---|---|
| 0 | $1,000.00 | |
| 1 | $1,024.14 | $24.14 |
| 5 | $1,126.69 | |
| 9 | $1,239.51 | |
| 10 | $1,269.43 | $29.93 |
Total interest after 10 years: $269.43. That ignores the three-month interest penalty for early cashing, which does not apply after 5 years.
The tax rates below are assumptions for illustration only, not predictions, and the example ignores deductions and any other income.
| Scenario | Tax on $269.43 of interest |
|---|---|
| Taxed at 10% | $26.94 |
| Taxed at 12% | $32.33 |
| Taxed at 22% | $59.27 |
If the same rate applies in every year, the total tax is the same either way. The difference is timing. Deferring lets you keep the unpaid tax money working for 10 years, while reporting yearly means paying about $2 to $7 of tax a year in the early years, depending on your rate, from other funds.
5. When reporting yearly can make sense
TreasuryDirect gives one example: bonds in a child's name. The child may pay tax at a lower rate than the rate that would apply years later when the bond is cashed. In the numbers above, the gap between a 10% rate on each year's interest and a 22% rate on the whole amount at the end is $59.27 - $26.94 = $32.33. Whether that applies to you depends on the child's income and the actual tax rules, so check IRS Publication 550 or a tax professional.
Who owes the tax also depends on how the bond is registered. TreasuryDirect says that if you buy a bond and name someone else, such as your child, as the only owner, the named owner owes the tax. If you buy a bond in your name with a co-owner, you owe it. If two people each pay part of the price, each reports interest in proportion to what they paid.
6. Switching methods
You can change from deferring to reporting yearly without IRS permission, but it applies to all savings bonds under that Social Security Number, and you must report all the interest those bonds earned in earlier years in the year you switch. Going back from yearly reporting to deferring requires IRS Form 3115 or the steps in Publication 550.
7. Where it goes on the return
Bond interest goes on your federal return on the same line as your other interest income. If a bond belongs to someone else, such as your child, the interest goes on that person's return.
8. Key takeaways
- Savings bond interest is federal-taxable and exempt from state and local income tax.
- You choose the method: defer until you receive the interest, or report each year.
- Deferring is the common choice, and it delays the tax; reporting yearly mostly matters when the owner's future rate would be higher.
- On a $1,000 EE bond at 2.40%, 10 years of interest is $269.43, which is $26.94 of tax at 10% and $59.27 at 22% (illustrative rates).
- Changing from deferral to yearly reporting needs no permission but is all-or-nothing for that Social Security Number.