Savings Bond Tax

Now that you have some US savings bonds, you need to know how to deal with US savings bond tax issues. Interests from United States savings bonds are taxed just like other types of investments. However, if you have these US savings bonds and decide to cash them out to pay for qualified higher education costs, you may not need to pay US savings bond taxes. In another word, your interests from US savings bonds are tax free.

How to redeem US savings bond tax free?

So, one way to not pay US savings bond tax is to redeem the savings bonds for qualified educational purposes. If you cash out your U.S. savings bonds to pay for qualified higher educational costs or to rollover the proceeds of the US savings bonds to a 529 plan or Coverdell Education Savings Account, you will not need to pay tax on US savings bond interests, provided your modified adjusted gross income (MAGI) is under a certain limit. The good news is that there is no limit to how much you can rollover.

Eligible US savings bonds for tax free redemption

Series EE US savings bonds qualify for this tax free redemption. See more information on Series EE US savings bonds and their tax free rollover. However, A series EE savings bond qualifies if it is issued after 1989. Series I bonds also qualify for the tax free redemption. Note that series EE savings bonds issued before 1989 and Series E savings bonds do not qualify for this tax free rollover or redemption.

Recap: way to not pay tax on US savings bond interests..

Use the proceed of the redemption of the savings bonds for:

• qualified higher educational costs such as tuition and fees for college, university, vocational school which meet federal financial aid standards.
• funding 529 plans or Coverdell Educational Savings Accounts.