Interest on U.S. Government Obligations
Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for Federal income tax purposes.
Treasury Bills generally have a 4-week, 13-week, or 26-week maturity period, although shorter and longer periods (a few days to up to 52 weeks) are possible. They are issued at a discount in the amount of $1,000 and multiples of $1,000. The difference between the discounted price paid for the bills and the face value received at maturity is interest income. Generally, this interest income is taxable when the bill is paid at maturity.
Treasury Notes are currently issued with maturity periods of 2, 3, 5, 7 or 10 years. Generally, interest (fixed rate) is paid every 6 months and taxable in the year paid.
Treasury Bonds, for many years, were only sold with 30-year terms, but in May of 2020, the Treasury started selling bonds with 20-year maturities. Treasury bonds pay interest every 6 months. The interest income is reported in the year paid.
Series HH Bonds were issued at face value. Interest is paid twice a year by direct deposit to the bond owner’s bank account. Cash method taxpayers must report interest on these bonds as income in the year it is received. Series HH bonds mature in 20 years. They were available prior to Sept. 1, 2004 in exchange for Series EE/E bonds or upon reinvestment of matured H bonds; they are no longer issued.
Series H Bonds were issued before 1980 and had the same tax treatment as series HH bonds. The income was reported as received. Series H bonds had a maturity period of 30 years. The last Series H bond matured in 2009. Series EE and Series I Bonds have interest payable when the bonds are redeemed. The difference between the purchase price and the redemption value is taxable interest.
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Series I Bonds - These are inflation-indexed bonds, first offered in 1998, issued at their face amount with a maturity period of 30 years. The face value plus accrued interest is payable at maturity. If they are redeemed within the first 5 years, the bond owner forfeits the most recent 3-months’ interest.
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Series EE Bonds – First offered in July 1980, Series EE Bonds issued before May 1997 earn various rates for semi-annual earnings periods beginning between May 1 and October 1, 2005, depending on dates of issue. Series EE bonds issued from May 1997 through April 2005 earn market-based interest rates set at 90% of the average 5-year Treasury securities yields for the preceding six months. A fixed rate of 3.50% applies for Series EE savings bonds issued from May 1 through October 31, 2005. Fixed rates for future issues are set each May 1 and November 1. Interest accrues monthly and compounds semi-annually. Bonds held less than five years are subject to a three-month interest penalty. EE bonds have an original maturity of 20 years, and an interest-bearing life of 30 years. If purchased electronically from the U.S. Treasury, the bonds are sold at face value; if purchased before 2012 in paper form from a bank, they were sold at 50% of face value but are not worth face value until redeemed.
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Series E Bonds – Issued at discount with face value payable at maturity, these bonds originally had a 10year maturity period. The maturity period was extended as follows:
| Issued | Maturity |
| By Nov 1965 | 40 Years |
| After Nov 1965 thru July 1980 | 30 Years |
Reporting Series E, EE and I Interest - If the cash method of reporting income is used, the taxpayer can report the interest on series EE, series E, and series I bonds in either of the following ways:
Method 1 Postpone reporting the interest until the earlier of:
• The year the bonds are redeemed, or
• The year they mature.
Method 2 Choose to report the increase in redemption value as interest each year. The same method must be used for all series EE, series E and series I bonds owned.
Change of Method
Change from Method 1 - The method of reporting interest can be changed from Method 1 to Method 2 without permission from the IRS. In the year of change, the taxpayer must report all interest accrued to date and not previously reported for all bonds.
Change from Method 2 - Permission to switch from Method 2 to Method 1 is required but is automatic if the taxpayer submits the required information (see 2021 Pub 550, page 7). As part of that agreement, the taxpayer must agree to:
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Report all interest on any bonds acquired during or after the year of change, when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and
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Report all interest on the bonds acquired before the year of change, when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.
Choice to Report Interest in Year of Trade – A taxpayer could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade.