INDIVIDUAL TAX | 09/02/2024
Series EE savings bonds have been a popular choice for Americans looking to save for college or support national initiatives. Initially issued in 1980 to replace Series E bonds, they were branded as “Patriot Bonds” from 2001 to 2011 to symbolize support for the nation’s anti-terrorism efforts.
If you own Series EE bonds—whether tucked away in a file cabinet or held electronically—it’s important to understand how their interest is taxed and what to do when they reach final maturity to avoid losing interest or encountering unexpected tax consequences.
How Interest Accrues on Series EE Bonds
Series EE bonds do not pay interest periodically. Instead, interest accrues and is reflected in the bond’s redemption value. The U.S. Treasury provides tables showing these redemption values.
- Tax Deferral: Most bondholders benefit from tax deferral, as interest isn’t taxed as it accrues unless an election is made to report it annually.
- Annual Reporting Option: If you choose to report interest annually, you must report all previously accrued but untaxed interest in the year of the election. This election applies to all your bonds for all future years and cannot be made selectively for specific bonds or years. However, there’s a process to cancel the election if needed.
For most bondholders, accrued interest is taxed only when the bond is redeemed or disposed of unless exchanged for a Series HH bond.
State and Federal Tax Considerations
- State Income Tax: Interest on Series EE bonds is exempt from state income taxes.
- Federal Tax Benefits for Education: Using the bond proceeds for qualified higher education expenses may exempt the interest from federal income tax, subject to certain conditions.
What Happens at Final Maturity
One of the key benefits of Series EE bonds is tax-deferred interest accumulation. However, this deferral has limits. Once the bonds reach final maturity, they:
- Stop Earning Interest: No additional interest accrues after maturity.
- Trigger Taxable Interest: All previously accrued and untaxed interest becomes taxable in the year of maturity.
For example, Series EE bonds issued in January 1994 will reach final maturity in January 2024, making all accrued interest taxable in 2024.
What Should Bondholders Do?
If you own Series EE bonds, it’s essential to check their issue dates:
- Redeem Bonds at Final Maturity: Redeeming bonds that no longer earn interest allows you to reinvest the funds into more profitable options.
- Consider Alternatives: Series I bonds, which offer an interest rate based on inflation, may be a viable reinvestment option.
How We Can Help
Understanding the taxation of Series EE bonds and managing their final maturity is critical for maximizing their benefits and avoiding unexpected tax liabilities. Our tax consulting team can help you:
- Evaluate your bonds to determine maturity status and taxable interest.
- Explore tax-saving strategies for education-related bond proceeds.
- Plan reinvestment options that align with your financial goals.
Contact us today for guidance on savings bond taxation and to optimize your investment strategy.