How Are I Bonds Taxes Handled? Understanding Tax Rules for 2025

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Yes, you do pay taxes on I Bonds. I Bonds pay out monthly interest, and the interest earned on I bonds is subjected to the following taxes, depending on your situation:

• Federal income tax
• Federal estate taxes
• Federal gift taxes  
• Federal excise taxes
• State estate taxes (If your state has those)

But I Bonds aren’t usually subject to state or local income taxes. This means if you live in a state or location with state or local income taxes, the interest earned from your I Bonds is exempt from those taxes.

When Do You Pay Taxes on I Bond Interest

You have two options for paying taxes on an I bond. Which is best for you depends on your situation.

1. Defer Taxes Until You Redeem the Bond or It Matures

If you are the sole or part owner of a bond, the most common choice is to defer paying taxes until you receive the interest, which occurs when you cash out the bond or it matures.

When you redeem a bond, you will receive a Form 1099-INT from the financial institution that pays the bond by Jan. 31 of the following year.

2. Report the Interest Annually

You can elect to report the interest earned on an I bond annually. This is a common choice when a bond is in a child’s name. Children typically make less income than their parents and therefore fall into a lower tax bracket. Claiming interest on their tax return each year will allow the child to keep more of the interest when they redeem it.

For example, a married parent filing jointly for tax year 2025 with an ordinary income of $200,000 would have the interest earned on the I bond taxed at 22%. If the child has no income other than the interest, and the interest is less than $11,000, the interest will only be taxed at 10%.

If you choose to report the interest annually, you will not receive a 1099-INT each year. You will need to check the total interest earned during the tax year.

Strategies to Minimize I Bonds Tax Impact

To minimize the tax impact of I Bond interest, there are several strategies that may help:

Defer Interest

The easiest way to minimize taxes each year on your I Bonds is to defer interest until maturity. I Bonds can be held for up to 30 years, so interest can be deferred for decades. Just remember to anticipate the tax bill when the I Bond finally matures or is cashed in.

Pay Interest Annually

If you’re in a lower tax bracket or are holding I Bonds for your kids — it may make sense to pay interest annually. This can help you pay your taxes over time – and pay a much lower rate each year than letting interest accumulate.

Use for Education Expenses

If you qualify — using I Bond interest for qualified educational expenses can make it completely tax-exempt. This means you won’t owe any federal taxes on the interest earned in the year you redeem the I Bond — up to the amount used for educational expenses that year.

Donate I Bonds

While donating I Bonds to tax-exempt institutions doesn’t avoid paying taxes altogether — you only pay the amount that has accrued since you purchased the I Bond. This can help you save taxes down the road as you won’t have to report interest earned on the I Bond after donating it.

How to Switch Between Tax Reporting Methods

You can decide to change when you pay taxes on your I bond’s interest as long as you follow IRS rules.

To switch from deferring to reporting annually, you’ll need to:

• Switch the reporting style for all bonds held in that Social Security number. For example, if you have three bonds in that Social Security number, you’ll need to change the way you report it for all of them.
• Report all the interest you’ve earned up to this point. So if you’ve held the bond and deferred taxes from 2019 to 2024, you’ll need to report all the interest you’ve earned during those five years, not just the interest you made in 2024.

You’ll also need to get permission from the IRS by sending a statement that meets all of the following requirements:

• Type or print “131” at the top of the statement.
• Type or print your name and Social Security number under “131.”
• Include the year of the change in the statement.
• Identify the specific I bonds affected — remember, this change will apply to all bonds attached to the owner’s Social Security number.
• State your agreement to report the interest on all I bonds following IRS rules.

How to Report I Bonds Interest on Your Taxes

If you choose to redeem your I Bond, or want to report the interest earned each year on your tax return — you’ll need to report the interest on Form 1040, line 2b. If you earn over $1,500 in interest on the I Bond, you’ll also need to attach Schedule B to your tax return.

If you choose to change how you report interest, you’ll need to fill out IRS Form 3115. This allows you to change your accounting method for handling I Bond interest.

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 contributed to the reporting of this article.

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