Are U.S. Savings Bonds and Treasury Obligations Taxed?

U.S. savings bonds and Treasury securities are taxed the same way at a high level: interest is subject to federal income tax and exempt from state and local income tax under 31 U.S.C. ยง 3124.1Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation When you actually owe that federal tax is the part that varies. A Treasury note pays you every six months and you report as you go. A Treasury bill pays nothing until it matures. A savings bond can defer tax for up to 30 years. And a TIPS bond can hand you a federal tax bill on money you haven’t received yet.

Treasury Bills, Notes, and Bonds

Marketable Treasuries all produce federally taxable interest, but the reporting timing depends on how the security pays.

Notes and bonds pay a fixed coupon every six months. You report that interest in the year you receive it, just like bank interest. Your broker or TreasuryDirect sends a Form 1099-INT with the amount in Box 3, the box specifically reserved for interest on U.S. savings bonds and Treasury obligations.2Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID

Treasury bills work differently. There’s no coupon; you buy at a discount and receive face value at maturity, and the difference is your interest. Under federal rules, the discount on a short-term government obligation doesn’t accrue until you redeem or sell the bill.3GovInfo. 26 CFR 1.454-1 – Obligations Issued at Discount Because T-bills mature within a year, most investors just report the interest in the year the bill matures. Buy a 26-week bill in October, hold it to maturity in April, and April’s return is where the interest lands.

Selling Before Maturity

If you sell a note or bond on the secondary market, any gain or loss is separate from the coupon interest you already reported. Whether it’s ordinary income or a capital gain depends on how you bought the bond. A bond acquired at a market discount generally produces ordinary income on the accrued portion of that discount when sold, while a sale price above your basis (beyond accrued discount) can produce a capital gain. The mechanics get technical quickly; IRS Publication 550 walks through market discount, premium amortization, and original issue discount.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses

Series EE and I Savings Bonds

Savings bonds give you a choice most other Treasuries don’t: you decide when to pay federal tax on the interest.

The Default Is Deferral

Unless you elect otherwise, you don’t report interest on an EE or I bond until the earliest of three events: you cash it, you transfer it to a new owner, or the bond reaches final maturity at 30 years.5TreasuryDirect. Tax Information for EE and I Bonds That last one catches people. When an electronic bond hits final maturity, TreasuryDirect sweeps the proceeds into your Certificate of Indebtedness and you owe federal tax on every dollar of accumulated interest that year, whether or not you wanted the cash.

On a bond held for decades, that can mean a large lump of interest hitting a single return. If you own bonds approaching 30 years, check the issue dates now rather than at filing time.

Electing to Report Annually

You can instead report savings bond interest each year as it accrues. You make the election simply by including the accrued interest on your return for the first year you want it to apply. Once made, it covers every savings bond you own and every one you buy afterward.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses

Switching back to deferral requires IRS permission. You file a statement with your return identifying the bonds and citing automatic change number 131; permission is granted automatically if the statement meets the requirements. Form 3115 is an alternative.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses

Annual reporting can be worth doing when a child owns the bonds and has little other income (the interest may end up taxed at zero), or when you want to spread interest across lower-bracket years rather than let it pile up.

Co-Owners

When two people are named as co-owners, the tax follows the money that bought the bond. If you paid for the whole bond and added your child as co-owner, you owe tax on all the interest. If you and another person split the purchase price, each of you reports interest in proportion to what you paid. In community property states, spouses who buy bonds with community funds each report half on separate returns.5TreasuryDirect. Tax Information for EE and I Bonds

TIPS and the Phantom Income Problem

Treasury Inflation-Protected Securities adjust their principal for changes in the Consumer Price Index. If inflation runs 3% in a year, a $10,000 TIPS position grows to $10,300 in principal. The IRS treats that $300 as taxable original issue discount in the year it occurs, even though the cash doesn’t arrive until you sell or the bond matures.4Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses

This is often called phantom income: federal tax on money you haven’t received. Your broker reports the annual inflation adjustment on Form 1099-OID in Box 8, which is reserved for OID on U.S. Treasury obligations.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID In a deflationary year the Box 8 figure can be negative and reduce your reportable OID.

The phantom income issue is why planners often place TIPS inside IRAs or other tax-deferred accounts. Series I savings bonds sidestep the problem in a different way: their inflation adjustments aren’t taxed until redemption or maturity.

State and Local Tax Exemption

Federal law bars states and localities from taxing interest on U.S. government obligations. The statute exempts the stocks and obligations of the U.S. Government from any state or local tax that would require the interest to be counted in computing the tax, with narrow exceptions for nondiscriminatory corporate franchise taxes and estate or inheritance taxes.1Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation

The exemption covers T-bills, notes, bonds, TIPS, and savings bonds. You claim it by subtracting the federally reported Treasury interest from your state taxable income on the appropriate line or schedule of your state return. It isn’t automatic. Skip the subtraction and you overpay.

Mutual Funds and ETFs Holding Treasuries

The state exemption doesn’t automatically pass through to shareholders of a fund that holds Treasuries. Whether the Treasury-derived portion of a fund’s dividends keeps its exempt status depends on your state. Most states allow the exemption for the portion of dividends derived from direct U.S. government obligations, but some impose an asset-composition threshold before any portion qualifies. California and Connecticut, for example, require the fund to hold at least 50% of its assets in federal obligations, measured at each quarter-end. Most other states impose no minimum. Your fund company reports the percentage of income from U.S. government securities in a year-end tax supplement, and that percentage is what you use to compute the state subtraction.

The Education Exclusion for EE and I Bonds

You can exclude some or all savings bond interest from federal tax if you use the redemption proceeds for qualified higher education expenses. The benefit is limited to Series EE and I bonds issued after 1989, and the rules are strict enough that many people who plan to use it end up disqualified.7Internal Revenue Service. About Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

Who Qualifies

Income Phase-Out

Even if you meet every other requirement, the exclusion shrinks as income rises. For 2026, phase-out begins at modified adjusted gross income of $101,800 for single filers and $152,650 for joint filers, and the exclusion disappears entirely at $116,800 and $182,650 respectively. Thresholds adjust for inflation annually, so check the Form 8815 instructions for the current year.

No Double-Dipping

Qualified expenses for the exclusion must be reduced by amounts already covered by tax-free 529 distributions, Coverdell ESA withdrawals, tax-free scholarships, employer-provided educational assistance, and education credits claimed on Form 8863.10Internal Revenue Service. Form 8815 – Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 A full scholarship can leave nothing for the bond exclusion to apply to.

How the Math Works

Form 8815 compares your qualified expenses (after other tax-free benefits) to the total redemption proceeds (principal plus interest). If expenses equal or exceed proceeds, all the interest is excludable. If expenses fall short, you exclude a proportional share. The excludable amount is subtracted on Schedule B.10Internal Revenue Service. Form 8815 – Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

When a Bondholder Dies

Deferred interest on a savings bond doesn’t disappear at death; someone still owes federal income tax on it. The executor picks between two paths. The first is to include all previously untaxed accrued interest on the decedent’s final return or the estate’s return, in which case the beneficiary who inherits the bonds is only taxed on interest that accrues after the date of death. The second is to leave the full liability with the beneficiary, who owes tax on all the accumulated interest when they eventually cash the bonds.

The bonds themselves are included in the decedent’s gross estate at fair market value, which for savings bonds means the redemption value (face plus accrued interest) as of the date of death.11Internal Revenue Service. Estate Tax The income tax on accrued interest is a separate obligation from any estate tax, and it applies regardless of estate size.

How to Report It All

Interest from Treasury securities lands in Box 3 of Form 1099-INT, not Box 1 where bank interest goes. Your broker or TreasuryDirect sends the form by January 31. If total taxable interest from all sources exceeds $1,500, you complete Schedule B (Form 1040), listing each source.12Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends TIPS inflation adjustments show up on Form 1099-OID rather than 1099-INT.

If you’re claiming the education exclusion, the excludable interest from Form 8815 is subtracted on Schedule B, Line 3. The remainder flows to your Form 1040 as taxable interest.

On the state return, subtract the full amount of U.S. government interest that was included in your federal AGI. Start with Box 3 of your 1099-INT plus any Treasury-related OID from your 1099-OID. If you hold Treasuries through a fund, pull the U.S.-obligations percentage from the fund’s annual tax supplement and apply it to your dividend income before calculating the subtraction.