Taxes on Savings Bonds – Form 8815 & More

 

When buying a Series I or electronic Series EE bond, you pay the face value of the bond. It accrues interest until the bond matures. Ex: You pay $1,000 for a $1,000 bond. Then, when the bond matures, you get the bond amount plus the accrued interest.

The difference between the purchase price and the redemption value is taxable interest income. You can report interest income from Series E, EE, and I bonds in one of these ways:

  • Report the interest in the year you earn it.
  • Report the entire amount of interest earned when the bond matures or when you redeem it, whichever comes first.

When you redeem it, you’ll receive a Form 1099-INT that shows the full amount of interest the bond earned. You can report the interest earned every year. If you do, you can subtract the interest you paid tax on in prior years from your taxable income.

By reporting interest annually, you can even out your income over the years. This is useful if your U.S. Savings Bond interest is substantial. Ex: If you had $1 million in bonds, the interest at maturity could be as much as $200,000.

If you start reporting bond interest every year, you must continue to do so every year after. This applies to:

  • Interest for bonds you own and any you gain later
  • All Series EE, Series E, and Series I bonds

For most investors, it probably works out better to report the interest when you redeem the bond.

Interest income exclusion for education

You can help pay college expenses by investing in bonds or by cashing in bonds you’ve already invested in. You can exclude the bond interest from taxable income if both of these apply:

  • You redeem Series I bonds or Series EE bonds bought after 1989.
  • You use the money to pay qualified education expenses.

To qualify for this tax break:

  • The student can’t own the bonds. The bonds must be in one of these:
    • Your name
    • Your spouse’s name
    • Both you and your spouse’s names as co-owners
  • You must be at least age 24 in the month before the bond was issued.

The bond amount might be more than the total education expenses. If so, you can only exclude a portion of the interest. Use Form 8815 to figure the interest income you can exclude from income.

The interest income exclusion is phased out at higher income levels. The levels are based on modified adjusted gross income (AGI). Use Form 8815 to figure your modified AGI.

For 2018, the exclusion begins to phase out at:

  • $77,200 if you file single
  • $115,750 if you’re married filing jointly or a qualifying widow(er)

It’s completely phased out at:

  • $92,000 if you file single
  • $145,750 if you’re married filing jointly or a qualifying widow(er)

If you file as married filing separately, you aren’t eligible for the exclusion.

To learn more, see:

  • Form 8815 instructions
  • Form 8818 instructions
  • Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)
  • Publication 970: Tax Benefits for Education

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