US Series I Savings Bonds: How to Purchase, Interest Paid & Taxation (2024)

During the last six months of 2021 and throughout all of 2022, US Series I savings bonds were one of the hottest investments. Millions of Americans rushed to buy Series I savings bonds during 2022, especially between May and November 2022 when a guaranteed interest rate of 9.62 percent made the I bonds tremendously popular.

Once Series I savings bonds interest rates started dropping in 2023, many Series I bond investors cashed in their Series I savings bonds to the tune of 6.45 billion dollars of I bonds. The $6.45 billion redemption amount during 2023 was approximately 22 times more than the number of Series I savings bonds cashed during 2022. The average bond’s redemption value during 2023 was $5,319.

SEE ALSO: Why the US Treasury Series I Bond Is an Attractive Investment During Periods of High Inflation

Before discussing the tax consequences of the record I bond redemption during 2023, it is important to review the basics of I bonds including how they are purchased, interest paid, and when I bonds mature.

Purchasing I Savings Bonds

Series I savings bonds may be purchased in two ways:

• In electronic form through the Treasury Department program called Treasury Direct. An investor may do so by going to the Treasury Direct website. Series I savings bonds can be purchased electronically in any amount to the penny for $25 or more. For example, an investor could purchase a $200.57 bond electronically.

• In paper form in denominations of $50, $100, $200, $500, $1,0000 and $5,000, and are purchased with federal income tax refunds using IRS Form 8888 (Allocation of Refund Including Savings Bond Purchases).

Series I Bond Interest Rates

A Series I savings bond earns interest calculated based on a fixed rate and a variable rate that is reset twice a year based on current inflation rates. The I bond earns interest until it reaches a maturity at 30 years or when the Series I bond owner cashes the Series I bond, whichever comes first.

Series I Bonds and Taxes

The following information discusses how the Series I bonds are taxed for those individuals who may have purchased I bonds for the first time within the last two years and cashed them in during 2023. All interest income is taxable as regular (ordinary) income for federal income tax purposes only. There is no state income tax due on cashed Series I bonds.

All taxable interest paid on Series I bonds is reported by the Treasury Department on IRS Form 1099-INT. Series I bond owners will receive an email from the Treasury Department notifying them of the existence of their 1099-INT, online.

A Series I bond owner who cashed a series I bond during 2023 must report the accrued interest on his or her federal income tax (Form 1040 or Form 1040-SR, line 2a). This is the case even if finding Form 1099-INT for cashed I bonds is more complicated than for other investments. Series I bond investors should be aware that a Form 1099-INT showing the taxable interest income resulting from the cashing of a Series I bond will not be mailed to the Series I bond owner. A Series I bond owner must log into his or account at www.treasurydirect.gov and navigate the page in which the Form 1099-INT can be downloaded.

The problem is that since everything associated with the reporting of cashed Series I bonds is digital, many Series I bond owners forget to download the Form 1099-INT and subsequently do not report the taxable interest income on their federal income tax return. This may result in the Series I bond owner receiving an IRS notice informing the owner that the interest was omitted from their federal income tax return for the year the bond was cashed.

Instructions for Downloading Form 1099-INT

Those Series I bond owners who cannot find the email from the Treasury Department that they received in January 2024 should go online here. Once on that page, the Series I savings bond owner should scroll down to:

Note that there is no print button on the Treasury Direct site. Therefore, the form should be copied and saved as a pdf file, and then uploaded to a commercial tax software or to a tax preparer’s secure web portal.

Checking an IRS Online Account

For individuals who may be unable to obtain online their 2023 Form 1099-INT showing the interest income from a cashed Series I bond online during 2023, they are advised to request an extension to file their 2023 income taxes. After April 15,2024 they should check their IRS “online accounts” for the Treasury Department issued 2023 Form 1099-INT.

Individuals can access their personal tax information online by setting up an IRS online account. In so doing, they can access their W-2 statement, all 1099’s issued, including 1099-INT, 1099-DIV, 1099-NEC and 1099-MISC, cancellation of student loan debt, Form 1098 and transcript information. Once they have all of their issued wage and income statements, they should be able to complete preparation of their 2023 federal and state income tax returns without the worry of missing any income information reported to the IRS and state revenue and tax departments.

Individuals interested in setting up their IRS online account should go here. When they do, they will see the following:

Federal Income Tax Withholding from Series I Bonds

Current Series I bond owners who want federal income taxes to be withheld when their bonds are cashed in the future can federal income taxes withheld from their cashed Series I bonds the same way that federal income taxes are withheld from a paycheck. To do so, a Series I bond owner needs to go to the Treasury Direct website, click on “Manage Direct” and then go to “Update my personal information.” From there, the Series I bond owner can set a voluntary default federal income tax withholding rate of up to 50 percent, which will be used on all future Series I bond redemptions.