The tax treatment of I Bonds is dead simple if you don’t do anything extra. You make it more complicated when you go against the default.
The Default – During Your Lifetime
By default, you don’t pay any taxes while you’re holding I Bonds and earning interest during your lifetime. There’s no RMD in I Bonds. TreasuryDirect doesn’t charge any fees while you hold the I Bonds.
You pay federal income tax on the amount of interest accumulated over the years only when you cash out or when the bonds reach maturity after 30 years. The interest earnings will be taxed as interest income at your normal tax rates, not as long-term capital gains. The interest income is exempt from state and local taxes. That’s a great tax break.
If you do a partial cashout from a purchase, TreasuryDirect will split the cashed-out amount proportionately into principal and interest. Suppose you originally bought $10,000 and the $10,000 grows to $15,000 with interest. When you cash out $3,000 from this purchase, which is 20% of the total value, TreasuryDirect will split it into $2,000 principal and $1,000 interest. You’ll pay tax on $1,000.
TreasuryDirect will track and calculate the accrued interest for you. They’ll generate a 1099 form for the year when you cash out any I Bonds or when any I Bonds mature. You log in to your TreasuryDirect account and download the 1099 form.
See Report I Bonds Interest in TurboTax, H&R Block, FreeTaxUSA for a detailed walkthrough of how to get the 1099 form and enter the information into tax software.
If you cash out I Bonds for qualified higher education expenses such as college tuition, and your AGI is below certain income limits, you get tax exemption on the interest. See Cash Out I Bonds Tax Free For College Expenses Or 529 Plan.
The Default – After You Die
The secondary owner or the beneficiary on your I Bonds inherits those bonds after you die. They can choose to cash out or continue to hold the bonds. Be sure to keep your secondary owner or beneficiary designations up to date. See How to Add a Joint Owner or Change Beneficiary on I Bonds.
By default, your secondary owner or beneficiary doesn’t pay any taxes when they continue to hold the I Bonds they inherit from you. I Bonds aren’t eligible for a step-up in basis. They’ll pay federal taxes on the untaxed interest since your original purchase when they cash out or when the bonds mature. The bond interest will be taxed as ordinary income, not long-term capital gains. The interest income is exempt from state taxes and local taxes. TreasuryDirect will track and calculate the interest and generate the 1099 form for the new owner.
This is the easiest for I Bonds investors.
Optional – Pay Up In the Year of Death
After you die, your surviving spouse or whoever files your final year’s tax return can choose to include all the accumulated interest earned through your date of death in the gross income on your final tax return. Then the secondary owner or the beneficiary will pay tax only on the interest earned going forward.
Your surviving spouse or the executor of your estate will need to do the calculation and deal with the tax consequences themselves if they choose this option. TreasuryDirect won’t generate any 1099 form unless they cash out your I Bonds.
Your secondary owner or beneficiary needs to keep the documentation to show how much interest was already added to your final tax return for the bonds they inherited. When they cash out the bonds or when the bonds mature, the 1099 form from TreasuryDirect will still show all the interest since your original purchase. In order to claim the tax exclusion, they’ll have to remember to back out the interest that was already included on your final tax return. See IRS Publication 559 (page 11).
Because it can be many years until they cash out the bonds or when the bonds mature, it’s quite possible they’ll forget and they’ll pay tax again on the whole thing when they have a 1099 form in front of them. I think it’s better to just go with the default and not go out of the way to pay up in the tax year of your death.
Optional – Report Interest Every Year
Reader Jeff left this comment on my post How to Buy I Bonds:
Your comment on taxation is a bit misleading. Yes, you can wait until maturity to declare the interest in you income. However, you do have the option of declaring the interest annually on your tax return. In some cases that can be better, especially for younger buyers who don’t have much (or any) taxable income to report.
I admit I left that part out of the scope of the introduction to I Bonds because it’s more of an advanced tactic. Let’s go into it now.
IRS Publication 550 says this on page 7:
Method 2. Choose to report the increase in redemption value as interest each year.
You must use the same method for all Series EE, Series E, and Series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.
Method 1 is the default we talked about already — you wait until you cash out or until the bonds mature. Method 2 is appealing when you’re in a low tax bracket. You avoid having all the accumulated interest come as income in one year when you cash out or when the bonds mature. As Jeff mentioned, this is especially true when I Bonds are owned by a child, whose standard deduction and low tax brackets may otherwise go unused each year.
This optional Method 2 is doable in theory but it brings complications in real life.
No Annual 1099
You don’t get much help if you choose Method 2. It’s not like you can change a setting in your TreasuryDirect account and you’ll start receiving 1099 forms each year. TreasuryDirect will always assume you’re going with the default. You’ll have to figure out on your own how much taxable interest to report each year.
No Periodic Statements
You see the current values of your I Bonds when you log in to your TreasuryDirect account. TreasuryDirect doesn’t produce any monthly or annual statements showing you the historical values and how much interest you earned during any month or year. When you’re doing taxes in March, it’s a small challenge just to figure out what the values were as of the end of last year.
Value on December 31
The IRS publication only says to report “the increase in redemption value” but it doesn’t say between which dates. Is it from January 1 to December 31? Or is it from December 31 of the prior year to December 31? Or is it from January 1 to January 1 of the following year?
After further research, reader Steven figured out that you should calculate “the increase in redemption value” using values on December 31 each year to report as interest on your tax return. See comment #7 under this post.
Unrealized Early Withdrawal Penalty
The redemption values you see in TreasuryDirect automatically exclude the potential three-month early withdrawal penalty when the bonds are within their first five years. It’s not clear whether “the increase in redemption value” is before this unrealized early withdrawal penalty or after.
Further research from Steven showed you should use the values on December 31 each year as reported by TreasuryDirect, with any early withdrawal penalty pre-deducted.
Bond-by-Bond Tracking Required
When you report interest annually, you make one entry on your tax return for all the I Bonds you own in your portfolio. When you finally cash out one of them, TreasuryDirect still assumes you’re going with the default and the 1099 form will include all the accumulated interest. You’ll need to back out all the interest you reported in previous years for that one bond you cashed out.
If you only rely on previous tax returns, (a) you’ll need to go back many years; and (b) getting the total for all bonds from previous tax returns isn’t enough. You’ll need the details bond by bond. If you only cash out part of a bond, you need to make further adjustments and also account for previous partial cashouts of the same bond.
If you use a tax preparer and you want them to track and report the interest every year, the extra cost required for this bond-by-bond tracking can easily overwhelm any tax savings from using the optional reporting method.
Risk of Paying Tax Twice
If you have been reporting interest every year and now someone else has to do your taxes for whatever reason, they may not know what was done before. It’s very easy to pay tax again when they have a 1099 form in front of them because that’s the default.
Savings Bond Calculator
If you really really want to take on reporting interest annually, it’s helpful to use the Savings Bond Calculator from TreasuryDirect. The calculator shows you the redemption value of an I Bond as of a given date.
The stand-alone calculator isn’t integrated into your TreasuryDirect account. Please read the instructions for how to save a list of bonds you own. You’ll have to update the list manually as you acquire new bonds and cash out old bonds.
Build and maintain a spreadsheet. Calculate the increase in redemption values using December-to-December values without any adjustment for the unrealized early withdrawal penalty during the first five years. Update the values in your spreadsheet with the values from the Savings Bond Calculator. Save screenshots of the Savings Bond Calculator as your documentation if necessary.
File Tax Return for Kid
As reader Jeff mentioned, reporting the interest every year works the best for kids under 18 who don’t have much other income. The interest will be absorbed by their standard deduction and they end up owing no tax.
If you’re taking this route for your kids, you should file a tax return for the kid to document the reported income even if the kid isn’t strictly required to file a tax return. This shows how much income has already been reported. When the kid finally cashes out the bonds, you use the cumulative reported income in previous years to offset the interest reported on the 1099 form.
***
Now you know why I left out the optional tax reporting method from the post How to Buy I Bonds. It’s much more complicated in real life than just that one sentence in the IRS publication. I’m not sure the juice is worth the squeeze. I happily go along with the default for my I Bonds.
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CMH says
Given that a child doesn’t have to file a tax return if they earn under $1100 in interest per year, is there a way to report interest on a child’s I bonds every year without filing a tax return for them?
Harry Sit says
If you don’t file a return for the child, nobody knows you’re using Method 2. When the child has no other income, the return is really simple. Just use one of the five free e-files that come with your tax software. Even filling out the form by hand isn’t that hard.
Don says
Hi. In new to I bonds. I’m little confused on this part:
“ You will have three fewer months of interest in the first year and 15 months of interest in the fifth year. Again, that’s odd but maybe that’s how they want it?”
Does this mean there is a 3 month penalty per year if redeemed in less than 5 years? For example, hold 3 years, penalty is then 9 months interest? I’ve only seen 3 month penalty in total in other sources.
Harry Sit says
I’m not sure why it gave you that impression. You get 15 months of interest in the fifth year, which is three more months than the normal 12 months in that year. That evens out the three fewer months of interest in the first year. The early withdrawal penalty is still three months of interest within the first five years, not three months per year.
Neil says
If I own I Bonds both in my name and in an LLC, can I report the interest annually just for the bonds in my LLC?
Harry Sit says
I don’t know. You might as well stick with the default in both. What’s good for the goose is good for the gander.
msf says
Much of what you describe for Series I savings bonds applies as well to Series EE and Series HH savings bonds.
https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eetaxconsider.htm#when
I agree that in many cases the benefit of paying taxes at death may not be worth the effort. Prepaying taxes on savings bonds or anything else generally makes sense only if the current tax rate (i.e. the rate of the deceased) is lower than the future rate (of the beneficiary). Meanwhile, one loses the use of the money spent on the early taxes.
The situation is different when the estate is subject to estate taxes. Paying the tax on interest to date of death reduces the size of the estate, thus saving as much as 40% federal and/or as much as 15.7% state (Hawaii). An alternative is to take an IRD (income in respect of decedent) deduction when the savings bonds are cashed, but do you really want to go there?
Keeping track of this deemed interest payment is similar to keeping track of the cost basis of a security. No matter how long ago one purchased a security, one must keep track of the cost. Likewise, no matter how long ago a lump sum tax payment was made, one must keep track of that.
Kevin says
Thanks a million for slogging through this, Harry! I was pondering whether or not to pay interest on my 2021 tax return and I now know my answer: I happily go along with the default for my I-bonds.
Mark says
Hi Harry,
You stated that “I Bonds aren’t eligible for a step-up in basis”. Can you provide a reference for that claim? A quick google search provided no clear results.
Harry Sit says
IRS Publication 559 (page 11), which is already linked in this post.
Mark says
Thanks!
Steven H says
Harry, thanks for this post, which helped me better understand some issues.
I am retired, and in a low tax bracket. I expect to pay less in taxes if I report interest annually. I bought my first I Bond in 2021, and am in the position of being able to now choose what reporting method to use.
I have a CD that posts interest on the first of the month, earned the previous month. The 1099s count interest in the year paid, not the year earned. Interest earned in December and paid in January is reported in the new tax year. This suggests that I Bond interest should be reported as the increment between the value as of the previous tax year’s December 31, and the current tax year’s December 31, which will include all interest paid during the current tax year, regardless of when earned.
As for the early withdrawal penalty, it seems to me best to report with it deducted. To do otherwise would require overriding what Treasury Direct shows, complicating tracking and recordkeeping.
Chris says
If someone sold an I bond on December 31st, then they get no interest for that month of December. Therefore, the interest reported on January 1st only applies to the new year, not the previous year.
Steven H says
IRS Publication 538, Accounting Periods and Methods indicates that most taxpayers use the cash method and calendar year. The concept of constructive receipt indicates that income is taxed when received and available for use.
I Bond interest is constructively received the month after it is earned. During the first five years, the last three months of interest are not constructively received.
The following instructions on the Treasury Direct website for the I Bond calculator verify that the as-of month should be December. The calculator’s YTD interest figure omits the last 3 months of interest for bonds less than 5 years old.
“If you choose to report interest to the IRS annually, check out the Calculator’s YTD Interest feature. It reports the amount of interest your paper bonds have accrued from the start of a year through the date you enter in the ‘Value as of’ section. Here’s how you can use this feature to calculate the amount of interest your paper bonds accrued in one calendar year: List the paper bonds you want to report annually. Enter December of the tax year in the ‘Value as of’ box. For example, if you want to find the interest your paper bonds accrued in 1999, enter ‘12/1999’ in the ‘Value as of’ box. Find the value in the ‘YTD Interest’ box. That’s the amount of interest your paper bonds accrued that year.”
I would think this should work equally well for electronic bonds as paper bonds, except for the maximum denomination of the calculator being $1000, requiring an adjustment such as 10x for electronic bonds. For those with both paper and electronic bonds, it would make sense to keep separate calculator lists for each for this reason.
Harry Sit says
Thank you Steven for digging into these. This settles the two outstanding questions: use December values with the early withdrawal penalty pre-deducted. I’ll update the post with your finding.
If you build and save a list of your bonds, the “YTD interest” only shows you the total without a bond-by-bond breakdown, which you’ll need when you cash out one of your bonds or part of one bond. You still need to track the December values in your own spreadsheet and do the subtraction yourself.
Kevin says
Great work, Steven and Harry.
Steven: “…except for the maximum denomination of the calculator being $1000, requiring an adjustment such as 10x for electronic bonds.”
Me: In my experience, the calculator will accept a maximum denomination of $5,000.
Harry: “If you build and save a list of your bonds, the “YTD interest” only shows you the total without a bond-by-bond breakdown, which you’ll need when you cash out one of your bonds or part of one bond. You still need to track the December values in your own spreadsheet and do the subtraction yourself.”
Me: Or, you can build and save a *separate* calculator *file* for each bond that you own. After you save (following the instructions linked by Harry, above), rename each saved html file for each bond.
John Endicott says
Don, as Harry points out it’s only 3 months penalty in total for withdrawing in the first 5 years.
Perhaps this will help you to visualize it::
Year 1: 9 months of interest (because the 3-month penalty is withheld
Years 2 thru 5: 12 months of interest each
Year 6: 15 months of interest (because the 3 months that was being withheld is now added back in).
Leighton says
Does this mean the 3 month penalty is taken off the front end (the first 3 months), rather than the back end (the last 3 months)?
Also, I read on another site that the penalty is for the interest only (which is 0 now), and NOT the inflation portion (which is the big part). Is that true?
Harry Sit says
The last three months, including the inflation portion.
Clay McLaughlin says
I’m new to investing in I Bonds via Treasury Direct. Is the amount of interest earned on your bonds ever displayed in your Treasury Direct account? Or do I need to use the Savings Bond calculator?
Harry Sit says
It’s displayed with the same 3-month lag in the first five years. If you bought in January you’ll see the first interest in May.
Robert Just says
I purchased I-bonds through my tax return and have recieved a refund today..
When should I receive the paper I-bonds? Is there a way to check on-line for the status of the I-bonds?
Harry Sit says
In a week or two. I don’t know any way to check. Just wait.
Old mariner says
I’ve been reporting interest every year on all my bonds. I started doing this many years ago because I was working and figured I had the money to pay the tax, and maybe when I actually cashed in the bond I’d be less flush. Thinking about it now, maybe it didn’t and doesn’t make financial sense to do it that way. On the other hand, if I die, my beneficiaries won’t have to pay tax on the interest.
I find it’s easy to figure out EE interest using the TD Bond Calculator. It’s more difficult to figure out I-bond interest if you have something like $8,880 in I-bonds. I don’t know why the Bond Calculator is so inflexible.
Thank you for this interesting, well-researched article.
Ravi says
Clarifying question on interest reporting on 2021 return- I bought Series I Savings Bonds in Dec 2021 and received a 1099-INT for 2021 from Department of Treasury, IRS by mail showing interest income for 2021. I didn’t receive any cash in bank and also don’t see interest amount posted on TreasuryDirect.
Going by default method mentioned above, I don’t need to report anything or pay any taxes on this interest income (on paper) for 2021. When I redeem these bonds in future, I do a simple math of Redeemed Amount (which will be post 3 month interest cancelation as penalty) minus principal I invested in bonds and report on the tax return of year I redeem.
Is that correct understanding?
Thanks
Ravi
Ravi says
Please ignore my post comment above – I believe the 1099-INT I received is for delayed refund from my 2020 tax return last year – I had filed my return in late April since tax deadline for 2020 was extended till July 15th, 2021 and my refund came much later due to IRS backlog in processing returns and refunds. I did get more refund than what my 2020 tax return showed. So this 1099-INT is for that interest IRS paid me on delayed refund (which came in early July)
Sorry for the confusion my comment may have caused.
Ravi
Old mariner says
Glad you figured out the purpose of your 1099. When we redeemed an EE bond, we received a 1099-INT from FRB Pittsburgh (aka Federal Reserve Bank of Pittsburgh). The form didn’t say Department of Treasury.
Josh says
Hi all, great post and comments!
I am looking to buy I-bonds for myself and my wife prior to May 1, and also for my young kids. My kids would benefit from the accrual method, which would require filing taxes each year (and paying none).
From wording on Treasury Direct site it almost sounds like if my kids do the accrual method that I would need to as well, which seems weird. I think it’s just the funny way they wrote it though.
Here’s what it says: “Once you start to report the interest every year (for example, for a child in the child’s Social Security Number), you must continue to do so every year after that for all your savings bonds (or, for example, the child’s bonds) and any you acquire (or, the child acquires) in the future.”
Harry Sit says
Your kids are separate taxpayers from you when you file a tax return for each of them. How the kids report income from I Bonds on their tax returns doesn’t affect how the parents report. I would file a tax return for the kids to document the reported income even if the kids aren’t strictly required to file a tax return.
Fritz says
I have a similar question: I have bonds that I report the interest on annually (from choosing Method 2 a few years ago), and my spouse and I file as married filing jointly. If my spouse purchases a bond, does she also have to report interest on her bonds annually (i.e. use the same reporting method as me) on our tax return?
Harry Sit says
The reporting method has to be the same for both filers on a joint return.
Shankar says
To purchase I-bonds for kindergarten age children, would one have to go through the same account registration process (using their SSN) or could parents simply gift them to their children? Thank you.
Harry Sit says
You open a Minor Linked Account for your child within your account. See Buy I Bonds in Your Kid’s Name.
Shankar says
Thank you very much Harry for the link. Was helpful to understand about the finer aspects of that route.
It looks like making contribution to 529 plan would be more appropriate over a I-bond, for our situation.
Edith says
Thanks for this and many other super-informative articles! I’m weighing whether to buy I Bonds for my kids and trying to visualize the work involved with Method 2 (annual interest reporting). Specifically, I’m wondering if any chance someone has experience on what this looks like on the tax return. According to 2021 Publication 550, p.8, “. . this choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year.” What does that mean exactly, “stating on the return?” Do you just write it somewhere on Schedule B, Part 1, line 1? “Child Name chooses to report interest every year on his iBond (serial number 123)?” It feels like a silly question, but I could see this little detail costing me hours of research at tax time!
Old mariner says
Hi, this is just my personal experience. I report savings bond interest annually. Yes, you actually write that statement on the return, on a line on Schedule B, Part 1, Line 1. Personally, I’d use that exact wording the first year. It’s just like writing out, for example, Bank of America, but instead of writing Bank of America you’re writing “Child chooses to report U.S. savings bond interest each year”, then insert the interest amount you are declaring.
You don’t have to write that line after the first year. The second and following years you can write something like “U.S. savings bond interest.”
The hours of research might occur from trying to figure out the interest you need to report. Treasury Direct doesn’t provide quarterly or annual statements. In fact, within your account, they provide no interest amounts at all. They only provide what the current value of your bond is on the date you access your account. There’s no way to view prior periods.
There is the Treasury Direct Savings Bond Calculator which can calculate interest, but it states it is accurate only for paper bonds, not for electronic i-bonds. I have no idea why that is. Nonetheless, prior to 2021, I used it and figured it was close enough.
For 2021 and beyond, I set a calendar reminder on my phone to check my TD accounts every December (and no later than December 31) and screenshot my bonds. This worked well for 2021. I had written down the values at the end of 2020, so all I had to do was some subtraction.
Stay organized from the start and come up with whatever system works for you.
Edith says
That’s very helpful. Thank you for the tips and for sharing your experience!
Finn says
I have an unusual tax question regarding ibonds. When depositing savings bonds into a trust, you have to report whether the accrued interest is reportable to the owner of the bonds in the year the bonds are placed in the trust. If under the guidelines set forth in FS Form 1851 you are not REQUIRED to accrue the interest on this year’s taxes, are you permitted to nonetheless ELECT to report the interest as of the date the bonds go into the trust?
msf says
The Form seems to give explicit tax rules. It says that if you are treated for tax purposes as the owner of the trust (e.g. the trust is revocable), then for tax purposes no transfer has taken place. No change of ownership – a non-event. This is checkbox 5a.
If you are not treated for tax purposes as even a partial owner of the trust, then there is a tax event – a transfer of ownership. The accrued interest to date becomes taxable to you. This is checkbox 5B. Same as if you were transferring the savings bonds to another person.
https://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm
You must check 5A or 5B; which one is completely determined by the situation. There seems to be no flexibility in selecting which one to check. If you’re not sure, you can get a letter ruling from the IRS. It’s the IRS and the tax regs that make the determination, not you.
It would be different if the transfer to the trust were due to death of the owner. There you might have an election, just as an estate has an election if the heir were another person instead of a trust.
https://www.irs.gov/pub/irs-wd/19-0029.pdf
Finn says
Thank you. That is incredibly helpful and I appreciate it. Because the form references owner or spouse, then bonds owned by the spouse would also be required to check the “no taxes” box, right?
Martha says
When you cash in an I bond, is the entire amount added as income or only the interest earned?
Harry Sit says
Only the interest.
MikeG says
I really don’t get all the hand-wringing over the tracking of I Bond interest each year. A simple excel spreadsheet with a column for each bond is really all you need to track this. Won’t take more than 5 minutes.
As far as how much to report (do you include December of the current year and/or should you apply the 3-month haircut), if you do include December of the current year and don’t apply the haircut, you will be reporting more income in the year you acquire the bond and you will pay more in income tax. How this create exposure for you with the IRS is beyond me. After all, they got their money “earlier “and in an amount that is “greater” than they would have gotten has you excluded the interest for December of the current year and/or included the 3-month haircut. Hard to imagine the IRS wanting to send money back to you that they would only get in a subsequent year(s).
Seems like very little work to include the interest each year to me if one wanted to do that. I find it appealing since it feathers the interest in over time and avoids a bolus of income all dropping in in one year possibly pushing me into the next higher tax bracket for a portion of that income.
Harry Sit says
The questions of whether to use the value in December or January and whether to include the early withdrawal penalty or not have been resolved through reader comments. I will edit those parts to avoid confusion.
The IRS allows Method 2. It’s certainly a viable path. Still, extra work is extra work to keep your spreadsheet synchronized with your purchases and redemptions. It’s not necessarily difficult but it’s one more thing you need to remember doing every year. Things can fall through the cracks as years go by, especially when you need to hand off the work to someone else (tax preparer, family member).
MikeG says
Commenting on Harry’s comment to my post (which may be below), I read the response in comment #7.
Having said that, it doesn’t make a lot of sense to me to exclude the last 3 months of interest in 2022 in my situation (we purchased our I Bonds in April of 2022). After all, there is no scenario whereby we would give back any of the interest earned in Oct – Dec as we can’t sell the bonds before April 1, 2023.
In addition, by including that interest in 2022, I am paying the income tax in an earlier year than Stephen H suggested in post #7. How could that possibly expose me to liability with the IRS???
Tracking just doesn’t seem complicated. I do my own taxes so no one to hand this spreadsheet over to and explain my rationale. I do not plan to hold these bonds for years and years anyway. Once the variable rate drops to the point where the rate is no longer compelling versus other options, we will jettison them.
Tom H says
Under the accrual method of reporting interest, how should I handle the interest earned on I bonds that are in my gift box? The interest is going to be delivered to a someone else, but not yet. So I suspect it’s not taxable to anyone until there is a delivery, and the tax treatment is up to the recipient. ???
Harry Sit says
The I Bonds in your gift box belong to the recipient. You don’t report the interest earned. The recipient does. Hope they go by the Treasury default and only report when they cash out.
Barbara says
Tried to use the Savings Bond Calculator you linked above and when I entered “I-Bond, $10,000 and my purchase date of 2022” it said:
The following error(s) have occurred:
! Impossible series/denomination/issue date selection. Valid issue
dates for $10000 Series I Bonds are 05/1999 through 01/2008.
Any ideas what happened here?
Harry Sit says
Enter $100 and multiply the result by 100.
Peter says
I have 10 paper I-Bonds, each 15 to 20 years old. Each co-owned by me and my mother. They were all originally purchased by her. On 5 of the bonds, her name is listed first, on the others my name is first. We have been using the default method for taxes. No taxes have been paid.
My mother now has very high medical deductions yearly, and is therefore in an essentially zero tax bracket. She would like to report the interest income to date on all bonds, on her tax return. With the deductions, this would not put her in a higher tax bracket.
I think she can, and should, do this, but am I missing something? (I think she would have to start reporting interest earned yearly on her tax return, and I would have to continue that on my tax return after she passes, but that is OK.)
Also, does it matter whose name is first on each bond?
BerkeleyMom says
Your mom can claim all the accrued interest this year and then claim each year’s interest going forward.
If you read the IRS publication covering savings bonds interest (can’t remember the name or number), it explains how you can change the method of reporting the interest from annual back to letting it accrue. As I recall, you simply attach a statement to you tax return with an explanation.
Peter says
Thanks. But I still wonder if it matters whose name is first on each bond. Can either co-owner do this?
BerkeleyMom says
I think the rules are that ownership is based on who bought the bond. So if your mom’s funds were used to purchase, then she can claim the interest on her taxes. If she got audited (seems unlikely), the explanation would be her funds were used to purchase the bonds and that position is consistent with the tax regulations.
Old mariner says
I thought it was an interesting question. Looking it up, I came across this official IRS webpage which is apparently some sort of course. I think it will officially answer your question: https://apps.irs.gov/app/vita/content/08s/08_08_042.jsp?level=basic
Unofficially, for many years I owned bonds with my mother. Her name was listed first. She declared and paid taxes on them for a few years, then we switched to me doing that.
Looking back now 30 yrs, I’m glad I paid taxes annually rather than on a lump sum at the end.
Peter says
Thanks. That helps
Mapleton Reader says
I got fooled for a time by the early redemption penalty, perhaps my experience may be of interest.
The IRS allows an above the line deduction for early withdrawals of savings (Box 2 on the 1099-INT). So why doesn’t Treasury Direct report that when cashing out I-bonds early? My thought is that since they do not show the total interest earned during the first 5 years of ownership (the interest is reduced by the penalty), there is no need to do the extra math (to report the full interest and then the penalty). For the IRS taxes, the net result is the same.
Harry Sit says
Banks treat the early withdrawal penalty as interest earned and then taken away. They report the gross interest as income and a separate early withdrawal penalty. TreasuryDirect treats the early withdrawal penalty as interest not yet earned. The reported interest already has the early withdrawal penalty pre-deducted.
PNW reader says
Hello Harry,
Thank you for this article and all your replies–really helpful of you to provide this information! I’m hoping my question is very simple…
When I filed my 2023 1040 return two weeks ago, I included the taxable interest (which was under $700) from my bank & provided the accompanying 1099-INT form. Today I received a blank Schedule B form from the IRS without any explanation, direction, letter, note, etc. That’s when I then remembered I have an I-bond from Nov. 2000, maturing in Nov. 2030. I’ve not done a partial cash-out of that bond (or any bond), nor have I sold it. (The interest accrued as of today is over $1,500.)
I didn’t think I needed to file a Schedule B since my total taxable interest in 2023 was under $1,500.
But, presuming that the IRS has sent this Schedule B because it wants me to file it, what am I supposed to write–and where–to indicate that I’m choosing the default position, ie: deferring interest payments until either a cash-out or its date of maturity?
Thank you!
PNW reader
Harry Sit says
I don’t think the blank Schedule B has anything to do with the I Bond you’re holding. No one reports to the IRS until you cash out the I Bond. You don’t need to do anything when you choose the default option.
PNW reader says
Thank you for such a quick response, Harry.
The I Bond was the only thing I could think of that has any relation to the Schedule B, so now I am even more confused about why I was sent it!
Thanks again for your input.
Take care,
PNW reader
John says
I fear you have already answered this question in your response to Fritz on May 11, 2022, but I wanted to be sure.
My wife and I both own I-Bonds. Mine are registered with my SSN and as “me” POD “wife”. Hers are registered with her SSN and as “wife” POD “me”. We each used our own funds to originally purchase the bonds.
We currently account for the interest under the cash method (Method 1). We file as married filing jointly. Can I change to the accrual method (Method 2) while my wife remains on the cash method (Method 1)? Or do we both have to be on the same method?
Actually, we both are planning to change to the accrual method, but we wanted to do it in different years to avoid the higher tax bracket due to the catch up.