Savings Bonds: Taxation of Interest
Interest on U.S. Savings Bonds is exempt from state and local income taxes. However, Federal taxes must be paid on this interest. Because bonds can be purchased for oneself, as a gift, or with another person (co-owner), each ownership situation will be treated differently in terms of who pays Federal income taxes on the interest. The following chart summarizes who is responsible for paying the taxes on bond interest.
| Who Purchases Bond |
Who Pays Taxes
on Bond Interest |
You purchase the bond with your own funds
but the bond is in your name
and the name of another person (co-owner) |
You |
You purchase the bond as a gift for another
person and that person is the sole owner |
The person for whom
you purchased the bond |
You and another person purchase the bond
together with both of you contributing money
to its purchase (you and the other person are co-owners) |
Both of you in proportion
to the dollar amount each paid |
There are two ways to report Savings Bonds interest for Federal tax purposes:
- Cash Basis Method – You defer reporting Federal income tax on the bond’s interest until you cash in the bond or the bond matures.
- Accrual Basis Method - You report the interest on the bond each year as it accrues.
You may switch from the cash method to the accrual method without any problems, but the IRA needs to approve your request to switch from the accrual method to the cash method.
