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US savings bonds, including Series EE and Series I, are taxed at the federal level but not at the state or local level. Series EE is a fixed interest rate accumulation bond, while Series I earns a fixed rate plus a variable inflation rate. Both bonds must be held for 12 months before redemption, and can be used to finance education with forgiven interest. TIPS bonds are taxable even when used for education.
Interest on savings bonds is taxed at the federal level but not at the state or local level. There are many types of United States Treasury bonds, including savings bonds labeled Series EE or Series I. Series E is an earlier version of Series EE and no longer pays interest. The government uses different methods to calculate the interest paid in the two series, each with its own fixed rates. Series EE is a fixed interest rate accumulation bond, while Series I is an accumulation bond that earns a fixed rate plus a variable inflation rate, based on the Bureau of Labor Statistics index called the price index. to the consumer – urban (CPI-U).
An accrual bond is one in which interest is added to the value of the bond and is paid when the bond is cashed. Federal tax on interest on savings bonds may be paid semi-annually, annually, or when the bond is cashed, at the taxpayer’s choice. Series EE bonds are purchased at 50% of full face value if paper bonds are elected, but full face value if purchased electronically. In practice, this means that the buyer will buy a $100 USD (USD) paper bond for $50 USD, or an electronic $50 USD bond for $50 USD, both worth $100 USD at maturity. Series I bonds are purchased at their full face value regardless of the form of purchase.
Both Series EE and Series I bonds are 30-year bonds. The reason Series I bonds are always purchased at face value is that the rate of inflation is unknown and subject to the markets, so the final value of the bond cannot be accurately predicted. Both series of bonuses must be held for 12 months before they can be redeemed. If the bondholder cashes in the bond during the first five years, he will be penalized three months of interest. Both bonds can be used in a program to finance education, and in this case the interest on the savings bonds is forgiven.
The US Treasury offers another inflation-protected bond, the Treasury Inflation-Protected Security (TIPS) bond. Someone wanting to buy savings bonds, especially if there is a possibility of using them for education, should make sure they are buying Series I bonds, not TIPS. Unlike Series EE and Series I bonds, interest paid in the TIPS program is taxable even when used for education.
Smart Asset.
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