Income tax on savings bond interest is due the year bonds mature.
Interest earned on U.S. Savings Bonds is subject to federal income tax, but is exempt from state and local income taxes. As of 2010, bond interest is also subject to state and federal estate, gift and excise taxes. When you cash in your bonds, you get an IRS Form 1099 INT showing the interest you earned. You report it on the interest-income line of your federal tax return.
Reporting Methods
You have a choice of interest reporting method. You can wait until the bond matures or is redeemed and report all the accrued interest at once on that year's tax return. Alternatively, you can report the interest you earn each year as it accrues. But once you elect annual interest reporting on any savings bond, you must report interest annually for all the bonds you own or may acquire in the future.
Tax Responsibility
If you buy a bond in your own name or with another person as co-owner, you are liable for paying the tax on the interest, says TreasuryDirect. If you buy a bond with another person as co-owner and you each contribute part of the purchase price, you and the co-owner are liable for the tax on the interest in proportion to the amount each paid for the bond. If you buy a bond in the name of another person who will be sole owner of the bond, that person will be liable to pay tax on the bond interest.
Education Tax Exemption
Interest on savings bonds bought after 1989 may be tax exempt if bonds are cashed in to pay tuition and related fees for the bond owner, his spouse or dependents at a college, university or qualifying vocational school. Under 2010 exemption qualification rules, a bond owner must be over age 23 with earnings below $70,100 if single, or below $104,900 if married filing jointly. Tuition and fees must be paid in the same year the bonds are redeemed. If bond proceeds exceed tuition expenses, the interest exempt from tax is prorated according to the percentage of bond proceeds used for tuition.
Bond Reissues
You won't owe income tax on your accrued savings bond interest if your bond must be reissued because your original bond was lost, says TreasuryDirect, or if you convert your paper savings bonds to electronic bonds. You also won't owe tax if you have a bond reissued to add or delete an owner, co-owner or beneficiary, or correct a major error in the original bond registration. But savings bond reissues become a taxable event if the name of a living owner, co-owner or surviving beneficiary of the original bond doesn't appear on the reissued bond. In reissues or conversions, interest rate and maturity dates remain unchanged.
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