How Are I Bonds Taxed? What Investors Need To Know

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I bonds are taxable — but how and when you pay taxes depends on your situation. I bonds earn interest monthly, and the interest can trigger different tax rules based on how the bond is used, transferred or redeemed.

In general, I bond interest may be subject to:

• Federal income tax
• Federal estate or inheritance taxes
• Federal gift taxes  
• Federal excise taxes
• State estate taxes — depending on the state

One important perk: I bonds are usually exempt from state and local income taxes.

How I Bonds Are Taxed: The Basics

Bonds earn interest monthly, and the interest is compounded and credited to your account once every six months. But you won’t receive it until the bond matures or you cash it in.

The interest is subject to federal income tax unless you use the funds for eligible higher-education expenses.

If you give I bonds to someone else or someone inherits them after you die, the transfer can trigger federal gift tax, federal and state estate tax and state inheritance tax on the entire value of the bonds, not just the interest.

Transferred bonds are also subject to federal excise tax, but that is unlikely to affect individual taxpayers.

When You’ll Pay Taxes on I Bond Interest

The Internal Revenue Service (IRS) offers two options for paying the tax on I bond interest.

Defer Taxes Until You Receive the Interest

Most people defer paying taxes until they receive the interest when they cash out the bond or it matures.

The benefit is that cash from the redemption covers the tax. But you can wind up paying more tax overall if you’re in a higher tax bracket when you redeem the bond compared to when you bought it.

Report the Interest Annually

You can report the I bond interest annually instead of deferring it.

This is a common choice when a bond is in a child’s name because children typically fall into lower tax brackets.

How People Commonly Own I Bonds

I bonds can be a good savings vehicle, whether you buy them or receive them from someone else. Here are some ways you might own them.

• Owning I bonds yourself: I bonds are among the safest investments available, and they protect your money against inflation.
• Co-owned I bonds: Registering a bond with a secondary owner ensures that if one of you dies, the other automatically becomes the sole owner.
• Gifting I bonds: When you purchase a bond as a gift, you register it in the recipient’s name. You’ll both need a TreasuryDirect account — if the recipient is a minor, you can link their account to yours.
• Donating I bonds to charity: You can give bonds to the charity of your choice — or reissue them, if you pay tax on the interest the bonds have earned.
• Inheriting I bonds: If a bond names you as the beneficiary, you’ll automatically inherit it upon the owner’s death. A bond owner can also bequeath a bond to you by including it in a will or trust.

Using I Bonds for Education

Using I bond interest for qualified educational expenses can make it completely tax-exempt if the expenses are qualified for exclusion, and you pay them in the same year you redeem the bond. You must meet all of the following conditions to qualify:

• The bond was issued to you, or to you and your spouse as co-owners, when you were at least 24 years old.
• The expenses were for you, your spouse or a dependent listed on your IRS tax return.
• Your filing status is something other than married filing separate returns.

For tax year 2025, the exclusion starts phasing out once your modified adjusted gross income exceeds $99,500 — $149,250 for joint filers. It phases out completely at $114,500 — $179,250 for joint filers.

Ways To Reduce the Tax Impact of I Bonds

Several strategies can reduce the tax impact of I bonds.

• Defer interest: I bonds can be held for up to 30 years, so interest can be deferred for decades.
• Pay interest annually: This can help you pay your taxes over time — and possibly at a lower rate.
• Donate I bonds: Although you’ll have to pay accumulated tax when you reissue it to the charity, you won’t have to report interest earned on the I bond after donating it.
• Educational use: Bonds redeemed for qualified education costs are tax-exempt.

Tradeoffs and Tax Planning Considerations

I bonds are a safe way to save for the future, but the tax liability can catch you off guard if you’re not careful. Here are some considerations to be aware of.

• Lump-sum tax risk: Unless you report the tax annually, you’ll have to pay it on up to 30 years’ worth of accumulated interest when you redeem the bond.
• Ordinary-income treatment: I bond interest is treated as ordinary income rather than a capital gain, which is usually taxed at a lower rate.
• Bracket effects: Redeeming a bond that has accumulated a lot of interest can bump you up into a higher tax bracket, which increases your tax rate.

How I Bond Interest Is Reported

After you redeem a bond, you’ll receive a Form 1099-INT showing how much interest you received. You’ll report that amount on your tax return.

To report the tax annually, you’ll have to go to your TreasuryDirect account to find out how much interest the bond earned that year. Use the TreasuryDirect Savings Bond Calculator to estimate the amount for a paper bond.

Once you know the interest amount:

• Report the interest income on line 2B of IRS Form 1040.
• If the interest is over $1,500, also report it on Schedule B (Form 1040).
• File IRS Form 8815 to exclude I bond interest for qualified education expenses.

How To Switch Between Tax Reporting Methods

To switch from deferred to annual reporting, calculate all the interest you’ve earned to date for all bonds held under your Social Security number. This is the amount you’ll report.

To switch from annual to deferred reporting, fill out IRS Form 3115.

How I Bond Taxes Can Work in Real Life: Quick Examples

Here are two real-world examples of how I bond interest works.

• Example 1: You purchase a bond for your child, in the child’s name alone. You report the interest annually on the child’s tax return to avoid them having to pay the whole amount when they redeem the bond. That could be 30 years later, when their tax rate would be much higher.
• Example 2: You were the named survivor on your parents’ savings bond. After you inherit the bond, you have it reissued in your own name and let it continue to mature. You decide to defer the tax rather than pay it out of pocket annually.

Final Take

The IRS requires you to report interest on I bonds when you redeem them, but you can opt to report your interest annually if you are in a lower tax bracket than you think you’ll be when you redeem the I bond. You can also claim the interest on an I bond tax-free if you use it for qualified education expenses.

Jen Pedrozo and Jacob Wade contributed to the reporting of this article.

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