How are I bonds taxed? Series I savings bond interest is taxed as ordinary income at the federal level, is fully exempt from state and local income tax, and the federal tax can usually be deferred until you cash the bond or it reaches final maturity at 30 years.
I bond interest is subject to federal income tax at your ordinary marginal rate and is exempt from state and local income tax. Tax is generally owed only in the year you redeem the bond or it matures. For 2026, the education tax exclusion phases out between MAGI of $101,800 and $116,800 (single) and $152,650 and $182,650 (joint) (Source: Rev. Proc. 2025-32).
How are I bonds taxed at the federal level?
Interest earned on Series I savings bonds is taxed by the federal government as ordinary income, taxed at your regular marginal income tax rate rather than the lower long-term capital gains rate. Only the interest is taxable; the principal you originally paid is never taxed again. This treatment applies whether the bonds are held electronically in a TreasuryDirect account or on paper (Source: IRS Publication 550, 2026).
Talk With Craig Wear's Team
Craig has helped IRA millionaires save over $1 million each in unnecessary taxes. Find out if a Roth conversion strategy fits your retirement, with no sales pressure and no product pitch.
Because I bond interest is ordinary income and not a capital gain, holding a bond longer does not convert the earnings to a preferential rate. The rate you pay depends on the tax bracket you are in during the year the interest is reported (Source: IRS Publication 550, 2026).
Are I bonds taxed at the state or local level?
No. Series I savings bond interest is exempt from all state and local income taxes, while remaining subject to federal income tax. TreasuryDirect states the interest is “subject to federal income tax, but not state or local income tax” (Source: TreasuryDirect, 2026).
The exemption is grounded in federal law. Under 31 U.S.C. Section 3124(a), obligations of the United States Government are exempt from taxation by a state or its political subdivisions. The statute carves out exceptions for nondiscriminatory franchise taxes and for state estate and inheritance taxes, which can still apply (Source: 31 U.S.C. 3124).
When do you pay tax on I bond interest? Two reporting methods
Most owners never pay tax on I bond interest until they cash the bond, because federal law lets you choose when to report it. There are two methods. The default cash method defers all interest until redemption, disposition, or final maturity. The accrual method reports the interest increase each year. The governing rule is IRC Section 454 (Source: IRS Publication 550, 2026).
Under deferral, tax is owed in the year that comes first among cashing the bond, another taxable disposition, or the bond reaching final maturity 30 years after issue. If you never cash a bond, the deferred interest becomes taxable in that 30th year (Source: TreasuryDirect, 2026).
| Feature | Deferral (cash method, default) | Annual reporting (accrual) |
|---|---|---|
| When interest is reported | Year the bond is cashed, disposed of, or reaches 30-year maturity, whichever is first | Each year as the value increases |
| Who commonly uses it | Most individual owners | Sometimes chosen for a child with little other income, or to smooth the tax bill |
| 1099-INT timing | One 1099-INT covering all accrued interest, issued the year you cash in, by January 31 of the following year | No annual 1099-INT is issued for accruing interest; the owner tracks it |
| Scope of the choice | Applies to each bond separately | Must apply to all bonds under that Social Security number and all bonds acquired later |
If you elect annual reporting, you must report all interest accrued to date in the first year and continue for every bond you own or later buy under that SSN. Switching back to deferral requires IRS consent, which the IRS grants automatically through the procedure described in Publication 550 (typically filed on Form 3115, the accounting-method change form) (Source: IRS Publication 550, 2026).
Will you get a 1099 for I bonds, and where is the interest reported?
Under deferral, no Form 1099-INT is issued while interest accrues. A single 1099-INT reflecting all accrued interest is issued in the year you cash the bond or it matures, either soon after redemption or by January 31 of the following year, and it appears in a TreasuryDirect account by that date (Source: TreasuryDirect, 2026).
You report the interest on Form 1040. If your total taxable interest for the year is more than $1,500, you must also file Schedule B; $1,500 or less can go directly on the interest line of the return (Source: IRS Savings Bonds FAQ, 2026).
How much tax will you pay on your I bonds?
The federal tax equals the reported interest multiplied by your marginal rate that year, with no state or local tax added. There is no fixed I bond tax rate; it follows your bracket in the reporting year (Source: IRS Publication 550, 2026). A worked illustration shows the mechanics.
Suppose you cash a bond and the 1099-INT shows $4,000 of accrued interest, and your marginal rate that year is an illustrative 22%. The federal tax would be about $880 (4,000 x 0.22), and the state tax would be $0 because of the exemption. The 22% figure here is a hypothetical marginal rate used only for illustration, not a quoted bracket.
Long deferral can create a planning caution. Thirty years of deferred interest reported in a single year can be a large amount that may push part of your income into a higher bracket, and it can raise MAGI-linked items such as the net investment income tax and Medicare IRMAA surcharges. Two mechanisms in the rules bear on this concentration: reporting interest annually under the accrual method, or redeeming bonds in more than one year rather than all at once.
The I bond education tax exclusion (2026 income limits)
Interest on qualifying I bonds can be entirely excluded from federal income when the proceeds pay qualified higher-education expenses in the same year, under IRC Section 135 and figured on Form 8815. The exclusion phases out over a MAGI range that is indexed for inflation each year (Source: 26 U.S.C. 135; IRS Form 8815, 2026). Many published guides still show the 2025 limits, so the current 2026 figures matter.
| Filing status | 2025 phaseout range (MAGI) | 2026 phaseout range (MAGI) |
|---|---|---|
| Single and other returns | $99,500 to $114,500 | $101,800 to $116,800 |
| Married filing jointly | $149,250 to $179,250 | $152,650 to $182,650 |
| Married filing separately | Not eligible | Not eligible |
For 2026, the exclusion begins to phase out above MAGI of $101,800 (all other returns) and $152,650 (joint), and is completely eliminated at $116,800 or more (other) and $182,650 or more (joint) (Source: Rev. Proc. 2025-32). The statutory base thresholds are $40,000 single and $60,000 joint, indexed since 1990 (Source: 26 U.S.C. 135).
Several conditions apply. The bond must be a Series EE or I bond issued after 1989. The bond owner, not the student, must have been at least age 24 before the bond’s issue date. Married taxpayers filing separately cannot claim the exclusion. Qualified expenses are tuition and required fees for the taxpayer, spouse, or a claimed dependent (Source: TreasuryDirect, 2026; Form 8815).
The room-and-board trap is easy to trigger. If a family cashes $5,000 of bonds but the school bill breaks down as $3,000 tuition and $2,000 room and board, only the $3,000 counts as qualified, so a portion of the interest stays taxable. Under the rules, a contribution of redeemed proceeds to a 529 college savings plan or a Coverdell education savings account is itself treated as a qualified education expense for this exclusion, provided the rollover is completed within the same tax year (Source: TreasuryDirect, “Using savings bonds for higher education,” 2026; IRS Form 8815, 2026).
Who owes the tax on I bonds: co-owners, gifts, and inherited bonds?
Who reports I bond interest depends on ownership. Co-owners each report interest in proportion to how much each contributed to the purchase. When a bond is reissued or transferred, the prior owner owes tax on interest earned through the reissue date, and the new owner owes tax only on interest earned afterward (Source: TreasuryDirect, 2026).
Gifting a bond generally accelerates the tax. When ownership is transferred by reissuing the bond in another person’s name, an original owner who used deferral must report all previously unreported accrued interest, from issue date to the transfer date, in the year of the transfer (Source: IRS Publication 550, 2026).
For inherited I bonds, the deferred interest does not disappear. Publication 550 describes two paths. The personal representative or surviving spouse filing the decedent’s final income tax return can choose to include all interest earned before death on that final return, in which case the person who acquires the bond reports only interest earned after death. If that choice is not made, the person who acquires the bond generally reports all the interest when the bond is later cashed or matures (Source: IRS Publication 550, 2026).
How I bond timing interacts with other retirement tax planning
Because the default cash method lets the owner choose the redemption year up to the 30-year cap, recognized I bond interest can fall in the same year as other income events. Redeeming in a year that also includes a Roth conversion stacks both amounts into the same brackets. This is neutral education on how the Section 454 deferral choice works, not a recommendation (Source: IRS Publication 550, 2026).
The same income-stacking logic touches Social Security taxation and Medicare premiums; related material appears in the Q3 research notes on the Social Security tax torpedo.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This article is educational and is not advice; for guidance on your own circumstances, consult a qualified tax or financial professional.
Frequently asked questions
Do I have to pay taxes on I bonds?
Yes, at the federal level. I bond interest is subject to federal income tax as ordinary income, though the tax is usually deferred until you cash the bond or it reaches 30-year maturity. The principal you paid is never taxed. In some cases, interest used for qualified higher-education expenses can be excluded entirely (Source: IRS Publication 550, 2026; TreasuryDirect, 2026).
Are I bonds taxed at the state level?
No. Series I savings bond interest is exempt from all state and local income taxes, under 31 U.S.C. Section 3124(a), which protects federal obligations from state taxation. Only federal income tax applies to the interest. State estate and inheritance taxes are a separate matter and may still apply to bonds held in an estate (Source: TreasuryDirect, 2026; 31 U.S.C. 3124).
Do you pay taxes on I bonds every year?
Usually not. Under the default cash method, you defer all interest and pay tax only when you cash the bond, dispose of it, or it reaches final maturity. You can instead elect the accrual method to report interest annually, but that election then applies to all bonds under your Social Security number and every bond you buy later (Source: IRS Publication 550, 2026).
How do I avoid paying taxes on I bonds?
Federal tax on I bond interest can be reduced or eliminated in limited ways the rules allow: using proceeds for qualified tuition and fees under the Section 135 education exclusion (subject to 2026 MAGI limits of $116,800 single and $182,650 joint), or timing redemptions into lower-income years. State and local tax never applies. Legally avoiding all federal tax is not possible outside these provisions (Source: 26 U.S.C. 135; Rev. Proc. 2025-32).
Are I bonds taxed as capital gains or ordinary income?
I bond interest is taxed as ordinary income, not as a capital gain. It is taxed at your regular marginal income tax rate in the year it is reported, with no access to the lower long-term capital gains rates. Only the interest is taxed; the return of your original principal is not (Source: IRS Publication 550, 2026).
Do you pay taxes on I bonds when you cash them out?
Yes, if you used the default deferral method. In the year you cash the bond, all previously unreported interest becomes taxable, and you receive a Form 1099-INT covering the full accrued amount by January 31 of the following year. If you had elected annual reporting, that interest was already taxed and is not taxed again at redemption (Source: TreasuryDirect, 2026).
Who pays taxes on inherited I bonds?
It depends on the reporting choice made on the decedent’s final return. The personal representative or surviving spouse can choose to include all interest earned before death on that final return, leaving the person who acquires the bond to report only interest earned after death; otherwise that person generally reports all the interest when the bond is later cashed or matures. State inheritance or estate taxes may apply separately (Source: IRS Publication 550, 2026).
Are I bonds tax free for college?
They can be, under the Section 135 education exclusion. Interest is federally tax free if used for qualified tuition and fees the same year, the owner was age 24 before issue, and MAGI is within the 2026 limits (below $116,800 single, $182,650 joint). Room and board do not qualify, and married filing separately cannot claim it. Claim it on Form 8815 (Source: 26 U.S.C. 135; Rev. Proc. 2025-32; Form 8815).
Sources
TreasuryDirect, “Tax information for EE and I bonds,” treasurydirect.gov (2026). IRS Publication 550, “Investment Income and Expenses,” irs.gov (2026). IRS Savings Bonds FAQ, irs.gov (2026). IRS Form 8815 and instructions, irs.gov (2026). Internal Revenue Code Section 135 and Section 454, 26 U.S.C. (via law.cornell.edu). 31 U.S.C. Section 3124(a), state-tax exemption for federal obligations (via law.cornell.edu). Rev. Proc. 2025-32 (section 4.17), 2026 inflation-adjusted education savings bond exclusion thresholds, irs.gov.
