You cannot have federal taxes withheld when cashing savings bonds. Neither a bank redeeming your paper EE or I bonds nor TreasuryDirect redeeming your electronic ones will hold back any portion of the proceeds for the IRS. The full redemption value goes to you, and the tax on the accumulated interest is yours to settle separately. That leaves you with a handful of practical options: send an estimated tax payment for the quarter you cash the bonds, increase the withholding on your paycheck, switch to reporting interest annually going forward, or, if the money is going toward college, qualify the interest for the education exclusion and owe nothing at all.
Why No Withholding Is Available at Redemption
The IRS’s voluntary withholding program runs through Form W-4V, and it covers a specific list of federal payments: unemployment compensation, Social Security benefits, certain railroad retirement benefits, Commodity Credit Corporation loans, certain crop disaster payments, and Alaska Native Corporation dividends.1Internal Revenue Service. About Form W-4V, Voluntary Withholding Request Savings bond proceeds are not on that list.
At the bank counter, this means you receive the full face amount plus accrued interest, and the bank later issues a Form 1099-INT reporting the interest.2TreasuryDirect. Cash EE or I Savings Bonds Redeeming electronic bonds inside TreasuryDirect works the same way. TreasuryDirect does offer withholding on Treasury marketable securities such as bills and notes, but that feature does not extend to EE and I savings bonds.
The interest itself is subject to federal income tax and exempt from state and local income taxes.3TreasuryDirect. Tax Information for EE and I Bonds So the federal bill is the one you need a plan for.
Send an Estimated Tax Payment for the Quarter You Cash the Bonds
The most direct substitute for withholding is a quarterly estimated tax payment using Form 1040-ES. If you cash bonds in June, you’d include the expected federal tax on that interest in your second-quarter payment, due June 15. Cashing in September? Use the third-quarter due date. The idea is to get the money to the IRS in the same window the income was received.
This matters because the IRS can charge an underpayment penalty if you owe $1,000 or more at filing after subtracting withholding and credits. You avoid the penalty by paying, through withholding and estimates combined, at least 90% of the current year’s tax or 100% of the prior year’s tax, whichever is smaller.4Internal Revenue Service. Estimated Taxes When a bond redemption pushes your income well above last year’s level, hitting the prior-year figure is usually the easier target.
To size the payment, look up the current value of your bonds on TreasuryDirect or a savings bond calculator and subtract what you paid. That difference is your interest. Multiply it by your marginal federal tax rate and send that amount. Slightly overpaying is safer than underpaying; anything extra returns as a refund.
Adjust Your Paycheck Withholding Before You Redeem
If you draw a wage, you have a second route. File a new Form W-4 with your employer and either reduce your claimed adjustments or request a flat additional dollar amount withheld each pay period. Set the extra so it roughly matches the tax you expect on the bond interest.
Wage withholding has a quiet advantage over estimated payments. The IRS treats amounts withheld from wages as paid evenly across the year, regardless of when in the year the withholding actually happened. So if you cash bonds in March but only bump up your W-4 in October, the extra October-through-December withholding can still cover the March event for penalty purposes. An estimated payment, by contrast, is credited to the quarter in which it is due.
Report Interest Annually to Avoid a Single Large Year
The tax code lets you pick when to report savings bond interest. Most holders defer everything until the year they cash the bond or the bond reaches final maturity. The alternative is to include the interest on your return every year as it accrues, even though no cash has changed hands.5Internal Revenue Service. Savings Bonds 1
Annual reporting won’t help with bonds you’re already cashing this year, but for bonds you plan to hold for a long stretch it converts one big tax year into many small ones. You can make the switch without asking IRS permission, but two conditions come with it. In the year you change methods, you must report all previously unreported interest the bonds have earned to date. And the change applies to every savings bond registered to your Social Security number, not just the ones you’d prefer to switch.3TreasuryDirect. Tax Information for EE and I Bonds For older bonds with decades of accumulated interest, that first-year catch-up can be sizable.
The Education Exclusion Can Zero Out the Tax
If the bond money goes toward qualified higher education expenses in the same year you cash the bonds, you may be able to exclude the interest from federal income tax entirely.6TreasuryDirect. Using Bonds for Higher Education When the exclusion applies in full, the withholding question goes away because there is no tax to withhold against.
The rules are strict:
- Only Series EE or I bonds issued after 1989 qualify.
- The bond owner must have been at least 24 years old on the issue date.
- The bond must be registered in your name, or in your and your spouse’s names. A bond registered with a child as owner does not qualify, even if the child is the student.
- Qualifying expenses are tuition and fees at eligible institutions, or contributions to a 529 plan or Coverdell ESA. Room and board do not count.
The benefit phases out at higher incomes. For tax year 2025, the exclusion begins to shrink when modified adjusted gross income exceeds $99,500 for single filers or $149,250 for joint filers, and disappears entirely at $114,500 and $179,250.7Internal Revenue Service. Publication 970 – Tax Benefits for Education Married taxpayers must file jointly to claim it. You report the exclusion on Form 8815 with your return.
What Arrives at Tax Time
By January 31 of the year after you redeem, you’ll receive a Form 1099-INT reporting the interest. For paper bonds cashed at a bank, the bank sends it. For bonds redeemed inside TreasuryDirect, the 1099-INT posts to your TreasuryDirect account.8TreasuryDirect. 1099 Tax Statements for Paper Savings Bonds and TreasuryDirect Savings bond interest shows up in Box 3, the box reserved for U.S. savings bond and Treasury obligation interest.
If your total taxable interest for the year is more than $1,500, you’ll also file Schedule B with your Form 1040.5Internal Revenue Service. Savings Bonds 1 A bond that has been earning interest for twenty or thirty years will almost certainly clear that threshold on its own. Hold on to the 1099-INT and any confirmation of estimated payments you sent during the year; you’ll match both against your final liability when you file.