Do You Have To Pay Taxes on I Bonds? (2024)

An I bond is asavings bond that earns two returns: a fixed interest rate and a variable inflation rate. New owners may wonder: Do I pay taxes on I bonds? The answer in most cases is yes, but when you pay it may change.

Check Out: What To Do If You Owe Back Taxes to the IRS

Do You Have To Pay Taxes on I Bonds?

You earn interest on an I bond monthly, but you only pay taxes on the interest in the tax year you claim it.

Interest earned on I bonds is subjected to the following taxes, depending on your situation:

• Federal income tax
• Federal estate taxes
• Federal gift taxes
• Federal excise taxes
• State estate taxes

When Do I Pay Taxes on I Bonds?

You have two options for paying taxes on an I bond. Which is best for you depends on your situation.

Defer Taxes Until You Redeem the Bond or It Matures

If you are the sole or part owner of a bond, the most common choice is to defer paying taxes until you receive the interest, which occurs when you cash out the bond or it matures.

When you redeem a bond, you will receive aForm 1099-INT from the financial institution that pays the bond by Jan. 31 of the following year.

Report the Interest Annually

You can elect to report the interest earned on an I bond annually. This is a common choice when a bond is in a child’s name. Children typically make less income than their parents and therefore fall into a lower tax bracket. Claiming interest on their tax return each year will allow the child to keep more of the interest when they redeem it.

For example, a married parent filing jointly for tax year 2023 with an ordinary income of $200,000 would have the interest earned on the I bond taxed at 24%. If the child has no income otherthan the interest, and the interest is less than $11,000, the interest will only be taxed at 10%.

If you choose to report the interest annually, you will not receive a 1099-INT each year. You will need to check the total interest earned during the tax year.

Switching Between the Two

You can decide to change when you pay taxes on your I bond’s interest as long as you follow IRS rules.

To switch from deferring to reporting annually, you’ll need to:

• Switch the reporting style for all bonds held in that Social Security number. For example, if you have three bonds in that Social Security number, you’ll need to change the way you report it for all of them.
• Report all the interest you’ve earned up to this point. So if you’ve held the bond and deferred taxes from 2018 to 2023, you’ll need to report all the interest you’ve earned during those five years, not just the interest you made in 2023.

To switch from reporting annually to deferring, you’ll need to get permission from the IRS by sending a statement that meets all of the following requirements:

• Type or print “131” at the top of the statement.
• Type or print your name and Social Security number under “131.”
• Include the year of the change in the statement.
• Identify the specific I bonds affected — remember, this change will apply to all bonds attached to the owner’s Social Security number.
• State your agreement to report the interest on all I bonds following IRS rules.

How To Avoid Paying Taxes on I Bonds

The only way to avoid paying taxes on I bonds is to use the interest on qualified education expenses in the same tax year you redeemed the interest. Qualified education expenses include tuition and fees at an eligible educational institution — most accredited postsecondary education institutions qualify — or contributions to a Coverdell education savings account.

You only qualify for the education exclusion if you meetall of the following requirements:

• The I bond was issued after 1989.
• You were at least 24 years old before the bond was issued.
• You are filing your tax return with any status except married filing separately.
• Your modifiedadjusted gross income is less than the annual limit. The annual limit changes yearly. For 2023, the limit is $167,800 if married filing jointly. The limit is $106,850 for all other eligible filing statuses.
• You redeemed the bond in the same tax year you made the qualifying payments.
• The qualified educational expenses were for your, your spouse’s or a dependent’s education.

Final Take

The IRS requires you to report interest on I bonds when you redeem them, but you can opt to report your interest annually if you are in a lower tax bracket than you think you’ll be when you redeem the I bond. You can claim the interest on an I bond tax-free if you use it for qualified education expenses.