As investors seek to insulate their portfolio from inflation and the ups and downs in the stock market, many have turned to Series I savings bonds (I bonds). Because of the high inflation rate, I bonds are now paying an interest rate of 6.89%, which is a healthy, safe return on your investment. This rate applies for bonds issued through April 30, 2023. The inflation rate changes every six months from the bond’s issue date. But don’t just focus on the investment return. I bonds also have important tax advantages for owners. For example, interest earned on I bonds is exempt from state and local taxation. Also, owners can defer federal income tax on the accrued interest for up to 30 years.
Unfortunately, though, the federal tax rules aren’t always straightforward. As a result, the tax treatment of I bonds varies depending on who owns the bonds, whether you gift the bonds to someone else and in some cases, how the bonds are used. What follows are descriptions of how and when I bond interest is taxed under federal law in 10 common situations. If you currently hold I bonds or are thinking about buying them for your investment portfolio, hopefully this information will help you trim your tax bill while planning for the future.
Note: Many people own EE bonds. Although they earn much less interest than I bonds, the federal income tax consequences are identical to those of I bonds. So, holders of EE bonds, most of these rules also apply to you.
