Dear Dr. Don,
My uncle has $150,000 in Series EE savings bonds. He plans to cash them in and wants to know how much would he have to pay in income taxes?
— Karen Kerfuffle

Dear Karen,
Savings bond investors have the choice of paying income tax each year on the interest income earned that year, or to defer paying taxes by waiting until the bonds are either redeemed or mature.

The TreasuryDirect Web page “Series EE/E Savings Bonds Tax Considerations” has more information some of which is presented below:

Methods of Reporting Interest
You have the choice of reporting interest earned on savings bonds in several ways.

Whenever you report savings bonds interest, it should be included with other interest income on your federal income tax return.

  • Cash Basis Reporting-federal tax is deferred until the year of final maturity, redemption, or other taxable disposition, whichever is earlier.
  • Accrual Basis Reporting-you report interest annually each year as it accrues. Once you start, you must continue to report interest earned annually for all savings bonds and notes you own and any you may acquire. This may be advantageous for EE/E Bonds in a child’s name.

If he downloads the “Savings Bond Wizard” from the TreasuryDirect Web site and inputs the information about his bonds, he’ll know how much of the value is taxable interest earnings, what the bonds are currently yielding and their next interest payment date.

If your uncle has been paying income taxes on the accrual basis, the tax bite won’t be too bad. If he’s using cash-basis reporting, cashing the bonds in all at once would mean a large tax bill.

How much your uncle would pay in income taxes would depend on what federal income tax bracket he is in. No state or local income taxes are due on the interest income.