Yes, Series I savings bonds are taxable, but only at the federal level. The interest is treated as ordinary income for federal tax purposes and is fully exempt from state and local income taxes. You can also avoid federal tax entirely if you use the bond proceeds for qualified higher education expenses and meet the income limits.
Federal Tax on I Bond Interest
I bond interest is taxable as ordinary income at the federal level. The bond earns a composite rate: a fixed rate set at purchase and locked in for the life of the bond, plus a variable inflation rate the Treasury resets every six months based on the Consumer Price Index.1TreasuryDirect. I Bonds Interest Rates
Interest accrues monthly and compounds semiannually over the bond’s 30-year life. You don’t receive cash payments along the way, but the growing redemption value is taxable interest income when the IRS eventually gets its share. You’ll owe federal income tax on every dollar of that interest at some point, whether you cash the bond early, hold it to maturity, or transfer it.2TreasuryDirect. Tax Information for EE and I Bonds
No State or Local Income Tax
I bond interest is completely exempt from state and local income taxes. Federal law bars states and their subdivisions from taxing obligations of the United States government, and savings bonds fall inside that protection.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation The only carve-outs are nondiscriminatory franchise taxes on corporations and state estate or inheritance taxes, neither of which touches an individual reporting interest income.
The exemption is automatic. There is no special form to file, and your state return should simply leave the interest out of taxable income. In a high-tax state, that treatment lifts the effective after-tax yield above what a fully taxable investment paying the same rate would deliver.
When You Pay the Federal Tax
You get to choose when the interest hits your return. Most owners use the cash method and defer everything until the year they cash the bond, the bond matures, or they otherwise dispose of it. This is the default, and you don’t have to elect it.4eCFR. Appendix to Part 351 – Tax Considerations
The alternative is the accrual method: you report the interest each year as it builds up, even though no cash has changed hands. That can help if you’re in a low bracket now and expect to be in a higher one later. Once you elect accrual, it applies to every savings bond you own and any you buy afterward, and switching back to the cash method requires IRS approval through Form 3115.4eCFR. Appendix to Part 351 – Tax Considerations
Early Redemption and the Interest Penalty
You can’t cash an I bond in the first 12 months at all.5TreasuryDirect. I Bonds After that, you can redeem any time, but cashing before five years costs you the last three months of interest. Cash at 18 months and you receive 15 months of interest.
The forfeited three months never gets paid to you, so it never lands on your tax return. Your Form 1099-INT reflects only what you actually received. After year five, there is no penalty and no reduction.5TreasuryDirect. I Bonds
The Education Exclusion Can Eliminate the Federal Tax
You may be able to keep the interest entirely out of federal taxable income if you use the bond proceeds for qualified higher education expenses in the same year you cash the bond. This is the Education Savings Bond Program, and for a family paying college costs it can make the interest fully tax-free.6Office of the Law Revision Counsel. 26 USC 135 – Income From United States Savings Bonds Used to Pay Higher Education Tuition and Fees
All of these conditions have to be met:
- The bond owner was at least 24 years old when the bond was issued. A bond registered to a child does not qualify, even later when that child is in college.7TreasuryDirect. Using Bonds for Higher Education
- If you’re married, you file jointly. Married filing separately is not eligible.6Office of the Law Revision Counsel. 26 USC 135 – Income From United States Savings Bonds Used to Pay Higher Education Tuition and Fees
- Your modified adjusted gross income is under the annual cutoff. For 2026, the phase-out starts at $101,800 for single filers and $152,650 for joint filers, and the exclusion is gone at $116,800 and $182,650 respectively.7TreasuryDirect. Using Bonds for Higher Education
- The expenses are paid to an eligible institution in the same tax year you redeem.
Qualified expenses are narrower than many people expect. Tuition and required enrollment fees count, as do contributions to a 529 plan or Coverdell education savings account. Room and board, textbooks, and courses tied to sports, games, or hobbies outside a degree program do not.8Internal Revenue Service. Publication 970 – Tax Benefits for Education
If the total redemption (principal plus interest) is larger than your qualified expenses, only a proportional share of the interest is excluded. Qualified expenses at 80% of the redemption means 80% of the interest is excludable. You claim it on Form 8815 with your return.9Internal Revenue Service. About Form 8815 – Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
Forms You’ll See at Redemption
When you cash an I bond under the cash method, TreasuryDirect issues a Form 1099-INT for the redemption year. Savings bond interest appears in Box 3, separate from other interest.2TreasuryDirect. Tax Information for EE and I Bonds If you deferred for years, that single 1099-INT reports every dollar of interest the bond ever earned, all in one tax year.
If total taxable interest for the year exceeds $1,500, you must complete Schedule B with your Form 1040.10Internal Revenue Service. Savings Bonds 1 For the education exclusion, add Form 8815.9Internal Revenue Service. About Form 8815 – Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
Under the accrual method, no 1099-INT is issued until you actually cash the bond, even though you’ve been reporting the interest year by year. When the eventual 1099-INT arrives showing the full lifetime interest, you adjust your return so you aren’t taxed a second time on amounts already reported.
Transfers, Inheritance, Estate and Gift Tax
Someone owes federal tax on every dollar of interest an I bond earns. Transfers just change who pays and when.
If you reissue an I bond into someone else’s name and remove yourself as owner, your deferral ends and you owe federal income tax on all the interest that accumulated while you owned it. The new owner is on the hook only for interest earned after the reissue date.11TreasuryDirect. Changing Information About EE or I Savings Bonds (Reissuing)
When a bondholder dies, the executor can elect to report all interest earned through the date of death on the decedent’s final return. If they do, the beneficiary who inherits the bond owes tax only on interest earned after that date. If the executor doesn’t make that election, the full lifetime interest passes through to whoever eventually cashes the bond, reported on a 1099-INT in the year of redemption.2TreasuryDirect. Tax Information for EE and I Bonds
Income tax is not the only layer. I bonds can also be subject to federal estate, gift, and excise taxes, and to state estate or inheritance taxes.2TreasuryDirect. Tax Information for EE and I Bonds Bonds you own at death, including accumulated interest, are part of your gross estate for federal estate tax purposes.
You can also buy I bonds as gifts through TreasuryDirect, up to $10,000 in electronic bonds per calendar year per recipient.12TreasuryDirect. How Much Can I Spend/Own? If gifts to any one person stay within the annual gift tax exclusion, which is $19,000 for 2026, no gift tax return is required.13Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Gifts above that must be reported on a gift tax return but generally won’t produce actual gift tax unless you’ve used up your lifetime exemption.