How to Avoid Paying Taxes on U.S. Savings Bonds: Exclusions and Timing

You can’t avoid federal tax on U.S. savings bond interest across the board, but the tax code offers several legitimate ways to reduce or eliminate what you owe. State and local income tax never applies to Series EE or Series I bond interest. Federal tax can be wiped out entirely if you use the proceeds for qualifying higher education and your income falls below set thresholds. And even when the education exclusion doesn’t fit, choosing when to report interest, staggering redemptions, and handling ownership changes carefully can keep your tax bill much smaller than it might otherwise be.

State and Local Tax Never Applies

Every holder of a U.S. savings bond gets this benefit automatically. Under 31 U.S.C. § 3124, obligations of the federal government are exempt from state and local income tax.¹ There’s no form to file. When you prepare your state return, subtract the bond interest from your state adjusted gross income on the line most state forms provide for federal interest adjustments.

One limit worth knowing: this exemption covers income tax only. If savings bonds pass through an estate, state estate or inheritance tax may still reach their value.²

The Education Exclusion Can Wipe Out Federal Tax

The Education Savings Bond Program under 26 U.S.C. § 135 lets you exclude bond interest from federal income tax when the proceeds go toward higher education. It’s the only route that eliminates federal tax entirely, and you have to meet every requirement. Missing one disqualifies the whole exclusion.

The bonds must be Series EE or Series I, issued after 1989.³
The bonds must be registered in your name, or jointly with your spouse. Bonds registered in a child’s name don’t qualify, even if you paid for them.⁴
You must have been at least 24 years old before the bond’s issue date.⁴
You can file as single, head of household, qualifying surviving spouse, or married filing jointly. Married filing separately doesn’t qualify.⁴
Your modified adjusted gross income must fall below the annual limits described below.
You must use the proceeds for qualified higher education expenses in the same tax year you cash the bonds.

What Counts as a Qualified Expense

Qualified expenses are tuition and required fees at an eligible postsecondary institution — an accredited college, university, or vocational school that participates in federal student aid programs. The expenses can be for you, your spouse, or a dependent you claim.³

Room and board don’t qualify. Neither do courses in sports, games, or hobbies unless they’re part of a degree or certificate program.⁴ Contributions to a 529 qualified tuition program or a Coverdell Education Savings Account do count.³

K-12 tuition paid directly does not qualify. The exclusion is limited to postsecondary education. You can, however, route bond proceeds into a 529 plan as a qualified expense, and the 529 plan may later be tapped for K-12 tuition under separate 529 rules.⁵

2026 Income Phase-Outs

Even if you meet everything else, the exclusion shrinks and then disappears as your income rises. The IRS adjusts the thresholds each year. For bonds redeemed in tax year 2026:⁶

Single, head of household, or qualifying surviving spouse: the exclusion begins to phase out at modified adjusted gross income (MAGI) above $101,800 and is gone at $116,800.
Married filing jointly: the phase-out begins above $152,650 and ends at $182,650.

MAGI starts with your adjusted gross income and adds back certain items, including the foreign earned income exclusion and the exclusion for employer-provided adoption benefits.⁴ Falling inside the phase-out range gives you a partial exclusion rather than none.

How the Exclusion Amount Is Calculated

If your qualified expenses meet or exceed your total bond proceeds (principal plus interest), all of the interest can be excluded, subject to the income phase-out. If expenses are less than proceeds, only a proportional share of the interest qualifies.³

Say you cash bonds for $10,000 in total proceeds, of which $2,000 is interest, and you paid $8,000 in qualified tuition. The excludable fraction is $8,000 ÷ $10,000 = 0.80. You exclude 80 percent of $2,000, or $1,600 of interest. The remaining $400 is taxable.

You run this calculation on IRS Form 8815, which asks for the student’s name, the school, your qualified expenses, your total proceeds, and your interest. The final excludable amount transfers to Schedule B of Form 1040.⁴ File Form 8815 with your return, and keep tuition receipts along with a record of every bond you cashed: serial numbers, issue dates, face values, and redemption amounts.

Rolling Proceeds Into a 529 or Coverdell

If you have no tuition bill in the year you want to cash your bonds, you can still use the education exclusion by depositing the proceeds into a 529 plan or a Coverdell ESA. The tax code treats those contributions as qualified higher education expenses for this exclusion.³

The deposit has to happen in the same tax year you redeem the bonds, and every other exclusion requirement still applies. If you deposit only part of the redemption, only the corresponding share of the interest is excludable. The upside is that once the money is in a 529, it keeps growing tax-free and can eventually pay for a broader range of costs than the bond exclusion allows on its own.

Choose When to Report Interest

If the education exclusion doesn’t apply to you, you still control the timing of federal tax on your bond interest. Two methods are available.

Cash method: you wait to report all accrued interest until you cash the bond or it reaches final maturity, which can be up to 30 years for both Series EE and Series I. Most bondholders use this method because it defers the tax on money they haven’t received yet. The risk: decades of interest hitting a single tax year can push you into a higher bracket.²⁷
Accrual method: you report interest each year as it accrues, even without cashing. This spreads the liability out and can keep you in a lower bracket.⁸

If you’re holding a stack of bonds that will all mature around the same time, stagger the redemptions across tax years to blunt the spike. Switching from cash to accrual is simple: start reporting annual interest and include everything previously unreported that year. The accrual election then applies to every savings bond you own or acquire later. Switching back requires filing IRS Form 3115 with your return for the year of the change.²

Watch the Social Security Interaction

Cashing a large bond while you’re collecting Social Security can create tax you wouldn’t otherwise owe. The IRS uses a “combined income” figure — adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits — to decide how much of your benefits are taxable.⁹

For individual filers, combined income above $25,000 makes up to 50 percent of benefits taxable, and above $34,000, up to 85 percent. For joint filers, those thresholds are $32,000 and $44,000. A single redemption that dumps decades of deferred interest onto your return can easily push you past those lines. Spreading redemptions across several years, or redeeming before you start Social Security, avoids the collision.

Gifting and Reissuing Bonds Triggers Tax

Changing ownership can force you to recognize interest you’d been deferring. If you have a bond reissued in someone else’s name and give up ownership, you owe tax on all interest that accrued while you owned it. Treasury reports that interest on a 1099-INT under your name and Social Security number.² The new owner then owes tax only on interest earned after the reissue date.

The same recognition rule catches transfers to a trust when you give up all rights of ownership, and transfers between spouses incident to a divorce.¹⁰ Simply adding a co-owner while keeping yourself on the bond is not a transfer of ownership, so no tax event occurs there.

Inherited Bonds: the Executor’s Election Matters

When a bondholder dies with unreported interest, someone has to pay tax on it. Who pays, and when, depends on a choice made on the decedent’s final return.

The executor can elect to report all interest earned through the date of death on the deceased person’s final income tax return. If that election is made, the heir owes tax only on interest earned after the date of death.¹¹ This often helps when the decedent was in a lower bracket or had little other income in the final year.

Without that election, the pre-death interest becomes income in respect of a decedent. The heir reports the full deferred amount when the bond is cashed or matures. As a partial offset, the heir may claim an itemized deduction on Schedule A for any federal estate tax attributable to that interest, which prevents the same dollars from being taxed twice.¹¹

Mind the Early Redemption Penalty

Before cashing bonds for any tax strategy, remember two timing rules. You can’t redeem a savings bond in its first 12 months. If you cash it after one year but before five, you forfeit the last three months of interest.¹² Cash a bond at 18 months and you receive 15 months of interest. If you’re timing a redemption to line up with tuition or a 529 contribution, factor the penalty in so the tax savings aren’t eaten by lost interest.

1
Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation
2
TreasuryDirect. Tax Information for EE and I Bonds
3
Office of the Law Revision Counsel. 26 USC 135 – Income From United States Savings Bonds Used to Pay Higher Education Tuition and Fees
4
Internal Revenue Service. Form 8815 – Exclusion of Interest From Series EE and I US Savings Bonds Issued After 1989
5
Internal Revenue Service. Publication 970 – Tax Benefits for Education
6
Internal Revenue Service. Revenue Procedure 2025-32
7
eCFR. 31 CFR Part 351 Subpart B – Maturities, Redemption Values
8
eCFR. Appendix to Part 351, Title 31 – Tax Considerations
9
Social Security Administration. Taxation of Social Security Benefits
10
Internal Revenue Service. Publication 550 – Investment Income and Expenses
11
Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
12
TreasuryDirect. EE Bonds