Savings bonds are purchased every year by many Americans, often as a way to save money while maintaining low risk.
Series EE bonds, which replaced Series E bonds, were first issued in 1980. Noting that from 2001 to 2011, they were actually designated as “Patriot Bonds”. The Patriot Bonds were a “special edition to fund anti-terrorism”, according to the U.S. Treasury Department.
Perhaps you are one of the many that have purchased Series EE bonds over the years. Maybe you have an actual paper bond and stored it away in a file cabinet or safe deposit box for safe keeping. Or perhaps you bought one electronically and have not “seen” it since. No matter how you purchased the bond, you may now be wondering:
- How the interest you have earned on the EE bonds is taxed, and
- What steps you need to take to when the bonds reach final maturity.
How Interest Earned is Taxed
Series EE bonds don’t pay out interest the year it is earned. Instead, the accrued interest is reflected in the redemption value of the bond (redemption values are provided in tables issued by the U.S. Treasury and can be found on their website).
Since the interest is not paid out as it is earned annually, it is not taxed annually, unless the owner elects to do so. An election can be made by bond holders to have the interest taxed annually. If this election is made, all previously accrued but untaxed interest on bonds the owner currently has must be reported on their tax return in the year of election.
In addition, if this election is made, it will not only apply to any current bonds, but also any bonds the owner may acquire in the future. This means the election cannot be made on a bond-by-bond or year-by-year basis. But do note, there is a procedure under which the election can be canceled if the owner wishes.
If no election is made, all the accrued interest found in the redemption value is taxed in the year when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond).
In the end, most bond holders do not make the election, and instead chose to benefit from the tax deferral.
Note: We are talking about federal income tax implications as the interest earned on EE bonds isn’t subject to state income tax. Though, if the interest earned is used for higher education, that may allow the owner to also not owe federal income tax on it.
Reaching Final Maturity
Like we have discussed, one of the main advantages for buying EE bonds is being able to accrue interest for the long-term without having to currently report or pay tax on it. However, the law doesn’t allow for this tax-free buildup of interest to continue indefinitely. Therefore, when the bonds reach their final maturity, they stop earning interest.
For Example: 30-year, Series EE bonds issued in August of 1994 will reach final maturity this month, August 2024. In addition to reaching final maturity this month, the bonds will also stop earning interest.
All accrued and untaxed earned interest will be taxable in tax year 2024 (assuming the bond was redeemed at final maturity and cash was received in 2024).
If you own EE bonds (paper or electronic), make sure to check the issue dates on your bonds. If they’re no longer earning interest, it is time to redeem the bonds and properly record the interest income on your tax return. Make sure to contact your Wegner CPAs tax advisor if you have any questions or would like more information on the taxation of Series EE bonds.
