Series I savings bonds (I Bonds) are popular for their inflation-linked interest and flexible tax treatment. Understanding when and how interest is taxed—and when it can be excluded for education—helps avoid surprises at filing time. The rules hinge on ownership, timing, and eligible uses of redeemed funds, so clear records and the right reporting method are essential.

Federal and state tax basics

I Bond interest is subject to federal income tax but is generally exempt from state and local income taxes. Interest accrues monthly and compounds semiannually, yet you don’t receive it in cash until you redeem the bond or it matures. For most individuals using the cash method, tax is due when interest is actually received—typically at redemption or final maturity. TreasuryDirect or your financial institution will issue Form 1099-INT in the year you cash the bond, showing interest to report. Because I Bonds can earn interest for up to 30 years, the ability to defer federal tax until redemption is a key benefit for long-term savers.

Two reporting options for interest income

You can choose between two approaches: defer interest until you redeem the bond (or it matures), or elect to report the increase in value each year. Deferral is the default and keeps taxes aligned with cash flow. Annual reporting may be useful if you expect to be in a higher tax bracket later or want to smooth income over time. If you adopt annual reporting, apply it consistently to all your savings bonds and keep detailed statements showing each year’s accrued interest. Changing methods later can be complex and may require adjustments to avoid double taxation, so review IRS guidance before switching. Regardless of method, your ultimate taxable interest will be the same—only the timing differs.

Ownership, minors, and gifting

Who reports the interest depends on who owns the bond and, for co-owned bonds, who paid for it. If you buy an I Bond in your name, you report the interest. If you purchase a bond in a child’s name with the child as owner, the child generally reports the interest on their return (subject to the kiddie tax rules). For co-owners, the purchaser typically reports all interest unless there’s evidence of a different arrangement. Gifting adds another layer: when you deliver a gifted bond to the recipient, future interest generally belongs to the recipient for tax purposes. Keep registration details and proof of payment to document who is responsible for reporting. Note that early redemptions within the first five years forfeit the last three months of interest; that forfeiture simply reduces taxable interest.

Education exclusion eligibility

Some or all I Bond interest can be excluded from federal income tax if you redeem bonds to pay qualified higher education expenses in the same tax year. To qualify, the bonds must be Series EE or I issued after 1989, and the owner who claims the exclusion must have been at least 24 years old when the bond was issued. If married, you must file jointly; married filing separately doesn’t qualify. Qualified expenses include tuition and mandatory fees for the taxpayer, spouse, or a dependent claimed on the return. They do not include room, board, insurance, or extracurricular fees. The exclusion is subject to modified adjusted gross income (MAGI) limits that phase out the benefit; these thresholds are adjusted periodically, so check the current IRS values for the year you redeem bonds. Bonds titled in a child’s name are not eligible for the exclusion on the parent’s return, even if used for the child’s education.

Calculating the exclusion and coordinating with 529 plans

The education exclusion is proportional: you exclude the share of interest that corresponds to the portion of redemption proceeds used for qualified expenses. First, reduce qualified expenses by any tax-free scholarships, grants, employer or veterans’ benefits. If you also use a 529 plan or a Coverdell ESA, you cannot double-count expenses for multiple benefits. However, redeeming I Bonds and contributing the proceeds to a 529 plan in the same tax year can qualify for the exclusion, subject to the same ownership, filing status, and MAGI rules. Careful coordination is crucial to avoid disallowance. Keep receipts, account statements, and a worksheet showing how you allocated expenses between scholarships, 529/ESA distributions, and bond proceeds.

Forms, records, and timing considerations

When you redeem, expect Form 1099-INT from TreasuryDirect or the paying institution for the total interest. Report interest on Form 1040; use Schedule B if required by the form’s thresholds. If you claim the education exclusion, complete Form 8815 to compute the excludable amount and include it with your return. Taxpayers who elect annual reporting should retain yearly accrual records from TreasuryDirect and reconcile them at redemption to prevent double inclusion. Consider timing: redeeming in a lower-income year can reduce tax; redeeming in a year with high MAGI may limit or eliminate the education exclusion. Finally, note that I Bonds stop earning interest after 30 years—redeeming shortly after final maturity avoids unnecessary delays and keeps your paperwork aligned with the tax year in which interest becomes fully taxable.

Practical examples and pitfalls to avoid

A parent who is the sole owner of I Bonds may redeem them to pay a child’s qualifying university tuition and claim the exclusion if they file jointly (if married), meet MAGI limits, and use the proceeds in the same year. By contrast, if the bonds were titled in the child’s name, the exclusion would not be available on the parent’s return. Another common pitfall is overlooking tax-free scholarships: if scholarships cover all qualified expenses, there may be no remaining costs to justify an exclusion that year. Similarly, using 529 distributions for the same expenses you attribute to bond proceeds can reduce or eliminate the allowable exclusion. Keeping contemporaneous records and aligning ownership, timing, and expense allocation helps preserve the intended tax benefits.

In summary, I Bonds offer flexible federal tax timing and a potential path to exclude interest when used for qualified education. Choosing between deferral and annual reporting requires a look at your long-term income picture and recordkeeping preferences, while the education exclusion hinges on proper ownership, filing status, MAGI limits, and eligible expenses. With careful planning and documentation, you can align redemptions with your financial goals and minimize avoidable tax friction.