Not Cashing Savings Bonds to Avoid Taxes

There is a common misconception about avoiding taxes by not cashing savings bonds. While there are no penalties for not cashing mature savings bonds, there is no benefit to holding them for tax purposes, either. Sometimes people wonder, “Do savings bonds expire?”

For the most part, I typically assume that people who have misinformation came by it honestly. Usually, they didn’t quite understand fully what they read or were told. After all, one of the trickiest things about achieving financial independence and personal finance is that there are so many exceptions and nuances. In a lot of cases, what is absolutely true for one person is not true for someone else because of their individual circumstances.

Tax Consequences of Cashing In Savings Bonds

us-saving-bondsUnfortunately, while the internet has given people easy access to vast amount of information, it does so without any verification that the information published is true.

The problem is compounded by those who read something inaccurate and then repeat it elsewhere. This makes the false information seem more valid because it is corroborated by another source, which, in fact, is just repeating something that was wrong.

That is why it is so important to verify financial planning information you read with an authoritative or trusted source.

Let’s start with the basics. You may pay taxes on the interest earned on savings bonds each year as the interest is earned. No one does this, but you theoretically could.

When cashing in savings bonds you DO have to pay taxes on the interest. Before you freak out, make sure you grasp the full meaning of that sentence. You pay taxes on the INTEREST ONLY, not on the amount you get from cashing in the bonds. That is a return of principal

For example, if you cash in savings bonds and get $1,000, you only pay taxes on the part of that $1,000 that is interest. Depending upon how long you had the savings bonds, that might be just a few dollars.

cashing savings bonds taxes series ee

To calculate how much taxes you owe when cashing in savings bonds, take the amount of money you get from cashing in the bonds and subtract the amount of money paid to buy the savings bonds.

Unless you have a big dollar amount of savings bonds, or you they are 20+ years old, chances are the interest is a fairly small amount. After all, interest rates have been very low for the last decade or so, so you weren’t racking up huge interest on those savings bonds.

There is a savings bonds calculator at TreasuryDirect that will tell you how much your bonds are worth, how much they were purchased for, and how much interest they have earned. Just enter the serial numbers and other information from your bonds to look them up. You only pay taxes on the interest.

So, if you got $1,000 EE Savings Bond in April 2010, and it is now November 2020, then the bond was issued at $500 (you buy EE savings bonds for half the face value), and it has earned $67.60 in those 10-plus years. You owe taxes on only $67.60, not the other $500. For people in the 20% tax bracket, that’s just about $13 worth of taxes.

In other words, unless you have a lot of savings bonds, or have held them 20+ years, there just isn’t any real reason to even be worried about the taxes on your savings bonds.

How To Avoid Taxes On Savings Bond Interest

For taxpayers below the income phaseout, savings bond interest on Series EE bonds issued after 1989, or Series I bonds, is tax-free if the bonds are redeemed in order to pay for higher education, or in order to contribute to a 529 plan. This is a great tax avoidance strategy for almost anyone who meets the income limits. Keep the proper records and savings bond interest is tax-free for every year you have kids in college, or when you contribute to a 529 plan. Just keep records. The amount invested in a 529 plan or paid for higher education must equal or exceed the amount of interest you take tax-free, and must occur in the same year. The IRS provides an optional Form 8818 to ensure proper record keeping. You do not file Form 8818. You just keep it in case you are audited. To claim the savings bond interest exclusion, file Form 8815, Exclusion of Interest from Series EE and I Bonds Issued after 1989 and attach it to your return.

To qualify, the bonds must be in your name, or the joint name of you and your spouse if you file jointly. You cannot claim this exclusion if the bonds are held in a child’s name, or jointly in the child’s name.

For 2020, the phaseout for single filers begins at $82,350 modified adjusted gross income (MAGI) and ends at $97,350

The phaseout for joint filers begins at $123,550 and ends at $153,550.

You Owe Taxes On Matured Savings Bonds

Which brings us to IRS Publication 550 – Investment Income (that, my friends, is an authoritative source) and a popular, but dead wrong tax-savings strategy.

U.S. savings bonds are a safe, and therefore low-paying, investment issued directly by the United States Treasury Department. Grandmothers have been giving their grandchildren savings bonds since World War II. In fact, a lot of people have amassed a bunch of savings bonds in safe-deposit boxes, and even shoeboxes, over the years.

Savings bonds are easy to buy directly from the government at the TreasuryDirect.gov website (dot gov — not dot com).

Savings bonds mature after a certain number of years. The popular EE Series Savings Bonds stop paying interest after 30 years, when the savings bonds reach maturity. All savings bonds stop paying interest when they reach final maturity. But, something else happens when savings bonds mature: the taxes become due on the interest. If you don’t pay, there may be penalties for cashing mature savings bonds without having paid taxes on the interest when it was due.

Taxes Due On Saving Bond Interest at Final Maturity

Here is where that not-fully understanding the nuances of savvy personal finance comes into play.

Savings bond interest is exempt from state and local taxes. It is, however, not exempt from federal income taxes. In fact, interest on savings bonds is taxed just like any other interest, with one exception. The taxes on savings bond interest may be deferred until the bond is cashed, or the bond reaches final maturity, whichever comes first.

The misinformation comes from folks who don’t notice the last clause of that sentence, likely because when they first learned about it, their bonds were years from maturity.

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Now, there are numerous people who think that you can avoid taxes on savings bond interest from bonds that have already matured by not cashing them.

That is not true. Don’t believe me just because I say so. Go to the source and read IRS Publication 550 under the U.S. Savings Bonds section and you will see under the heading Reporting options for cash method taxpayers:

Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature.

That “the earlier of” is IRS-speak for whichever one of these these things happens first. In other words, they IRS does not care if you never cash in your savings bonds. There is no IRS penalty for not cashing in mature savings bonds, but you still owe the taxes on the interest when they mature whether you cash in your savings bonds or not.

The bad news is that many savings bonds are tagged with the social security number of the owner, so it’s only a matter of time before a computer gets around to deciding that the dollar amount is big enough to worry about. Worse, yet, for anyone being targeted for an audit, you can be this is a big fat red flag on your file.

Obviously, if you only have $300 of savings bonds, no one is going to bother unless they figure out a way to automate it. Of course, if you only have $300 worth of savings bonds, then why are trying to avoid the taxes? When you cash them in you’ll get $300 and most likely owe less than $10. You are still coming out ahead and you can start earning interest on what is left.

Otherwise, you can roll the dice and hope the IRS never bothers with you and your savings bonds. Of course, if they do make the effort, you’ll owe interest and penalties on the taxes you owed but never paid on your unreported income. Worse, they may just decide to go ahead and look at the rest of your tax return.

You never want the IRS looking at your tax returns.

Cash in your savings bonds when they mature. Don’t try and make this one of your tax tricks.

Do Savings Bonds Expire?

While savings bonds do mature, savings bonds do not expire in the sense that they lose the ability to be cashed in. You can cash in long-ago matured savings bonds just like any other non-mature savings bonds. Savings bonds do expire in the sense that they stop earning interest making them no more valuable of an asset than hiding some money in your mattress. If nothing else, cash in your matured savings bonds and put them in a high-yield savings account to earn at least a tiny bit of interest on them. Better yet, cash in my mature savings bonds and put them to work in your long-term investing portfolio.

Source: IRS Publication 550

21 thoughts on “Not Cashing Savings Bonds to Avoid Taxes”

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  3. I paid taxes on my 2019 tax return correctly when my Series EE bonds matured in 2019. When I redeemed them in 2020, I received a 1099-INT with the interest shown. Do I just ignore this interest on my 2020 return since it was reported on my 2019 return?

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  5. Is there another citation besides IRS Pub 550, like the Federal Register, that establishes or cites the rule requiring that the interest be reported when the bond reaches its 30 year final maturity date?

  6. I had some 1986 EE bonds that stopped earning interest in 2016. Did not know I had to pay interest on them the year they matured (forgot what the maturity date even was). Cashed them in 2020. Now I have to file a 2016 1040X amended return, I believe, which increases my total income, raises my Social Security taxable amount significantly, and increased my Health care coverage penalty (did not have healthcare) by $300. Wish the US Treasury would send out notices.

  7. If someone doesn’t make enough to pay taxes, and cashes in a savings bond, still keeping them under the amount where they would have to pay taxes. Do they have to file and pay tax on just the bond.

    1. There are two questions here. One is are you required to file taxes, and do you have to pay taxes. If you are under the limit to have to pay taxes, then the income from bonds is no different from any other kind of income and you wouldn’t have to pay on it. Whether or not you have to file is another question altogether that depends on your specific circumstances.

      1. Income is Social Security only. And when bon matures the interest will be $2500.00. So basically it would’ve be only income over and above Social Security. There are no other forms of income.

        1. Put it into TurboTax and see what it says.

          The Free Edition can do 1099s for Savings Bond interest and your 1099-SSA.

          But I doubt you owe anything unless your Social Security was already taxable or close to it.

  8. Cynthia A Bretzing

    My mother in law purchased EE and HH bonds many years ago and added her son, my husband onto the bonds. They have both passed. My husband being the last to pass, and I still have some of the savings bonds left that I want to give to his children. Can I give them the bonds as they are and let them cash them as they wish? And am I responsible for paying the taxes on them?

  9. My husband and i are now care takers for my brother in law,. We have POA’s and Health Advocate docs already in place. He has collected SSI and is on Medicaid. We recently discovered he has savings bonds, quite a lot of them. Most matured and some coming up. He is disabled, autistic and had collected SSI since birth.
    If we cash these EE bonds, can we put them into a trust account or an Able account without tax implications? He does not file taxes, he was claimed by someone else and his SSI is used for his care.
    Are there any special circumstances around special needs people?

  10. My mother bought savings bonds that are held jointly with me. I wasn’t aware of them until after She died. Over half have reached maturity. Am I responsible for the taxes?

  11. Aside from tax related issues… do EE bonds ever expire? If you do not cash them, will you ever owe money for not cashing them in at maturity? Are these uncashed bond still part of the US debt balance until cashed?

  12. I am interested in starting my children savings bonds and would like to know what are the pros and cons and just exactly what do I have to do.

  13. Throughout the years I have bought EE bonds I have had them issued with each separate childs name on them as well as my own. In the last few years (Im 97) I have doled out some of those which have expired to my children. and instructed them upom cashing to report the interest to the IRS which I assume they had done. Upon my demise I expected my adminisrator to pass themon to the children, they paying the taxesAlso I was informed in an EE mail 3=4 years ago that the taxes dont need to be paid even if expired until they were cashed. Ive never cashed for myself/ It would be very difficult to figure this out now. What am I going to do?

  14. Looks like I will be inherting some E and EE savings bonds. The executor of the estate has chosen for the estate not to pay taxes on the interst but instead for it to pass to the heirs. All of the bonds have passed their final maturity (some last year, and some as far back as 10 years ago). As you say in your article, federal income tax was due upon maturity, so can we force the excutor to amend the 3 previous years returns to correctly pay the interst on those bonds that matured in those 3 years? What should or could be done for the bonds that matured prior to 3 years ago?

    1. I don’t have any idea how estate law works or what you can do about an executor’s decisions. However, he may be doing that to avoid some issues for the estate. Theoretically, if the taxes on those bonds that are 10-years old were never paid, then not only are they due, they are overdue, and that comes with penalties and interest. By passing it on to you, that goes away. But, that’s just a guess.

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