ALM Tax Service
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DO YOU OWN SERIES EE OR I SAVINGS BONDS?
Do you have savings bonds that have matured and stopped earning interest? It is important to check your savings bonds to see if they are still earning interest. How long savings bonds earn interest depends on the issue date. Series E bonds, issued from May 1941 through November 1965, earned interest for 40 years. If you own any Series E bonds, they are no longer earning any interest. Bonds issued after November 1965 mature in 30 years. Series I bonds mature after 30 years. Lost or misplaced bonds can be reissued by filling out Form PD F 1048.
Series EE Bonds
Series EE bonds replaced the Series E bonds in 1980. Both these bonds were traditionally issued as a paper bond but can now be purchased in electronic form. Paper bonds were sold at a discount, and the difference between the redemption value and purchase price is the interest. Series EE must be held for a minimum of one year; there is a penalty of three months interest, if redeemed during the first five years. The method for calculating the interest on savings bond has changed several times. For bonds issued after May 1, 2005, the interest is fixed for the life of the bond. The fixed rate of interest is fixed on May 1 and November 1. That rate is used for all bonds issued during the six month period. Bonds issued between May 1995 and May 2005 had variable rates of interest which were adjusted each six months. Bonds issued before May 1995 also had a variable rate for the first 17 years. From 17 years until maturity the rate is fixed.
Series I Bonds
Series I bonds are issued at face value with a maturity of thirty years and must be held for a minimum of one year. The face value plus accrued interest is payable at maturity. The interest is split into two parts. The one part is fixed based on when you bought the bond; the other part is indexed to the current inflation rate and is determined every six months. If Series I bonds are not held for a minimum of five years, the owner forfeits the interest for the last three months.
Taxability of Interest
Interest on savings bond is subject to federal income tax, but not state income tax. Who is responsibility for paying the tax on these bonds? If a bond is purchased with one name on the bond, that person is responsible for the tax. If a taxpayer buys a bond with a co-owner, the person whose funds bought the bond is responsible for the tax. If two persons buy a bond as co-owners with each contributing the purchase, both owners are responsible for the tax in proportion to the amount paid.
There are two options for reporting the interest on your tax return.
Method 1: Report the increase in the redemption value as interest each year.
Method 2: Postpone reporting the interest until the bonds are redeemed or the year in which the bonds mature. Even if you choose not to redeem the bonds upon maturity, you are obligated to report and pay the tax in the year of maturity.
Taxpayers must use the same method for all savings bonds owned.
Excluding Interest on Savings Bonds
Taxpayers may be able to exclude some interest on savings bonds issued after 1989, if the proceeds are used for qualified educational expenses. The bond must have been issued to a person who was at least 24 years old. If the proceeds are used for qualified higher education expenses for the taxpayer, taxpayer’s spouse, or the taxpayer’s dependent and the taxpayer’s income is within the limits, the interest from the bonds can be excludable from federal income tax. Qualified education expenses are limited to tuition and required fees. Income limit for married filing jointly is $104,900; for single or head of household filers it is $69,950. Form 8815 is used to calculate the interest exclusion.