Are Government Savings Bonds Tax Deductible ?
The US government has two types of saving bonds, namely I bonds and EE bonds. There used be another type of saving bond, the HH bond, but the government stopped issuing it in 2004. However, HH bonds are still held by many people. The only thing is that they cannot be bought. |
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Saving bonds are different from Treasury bonds. These bonds cannot be sold and bought in the bond market like the Treasury bonds. In addition, saving bonds are protected for inflation. The bonds not only earn a specified interest rate, they also earn the current rate of inflation, which is adjusted from time to time. Also, there is a cap on the $5,000 I and EE bonds purchase for per year. A person can redeem the bonds after one year of purchase but if he does this before five years of purchase, he is liable to pay a penalty which is in the form of three months of interest payment.
The next thing that an investor would want to know is whether government saving bonds are tax deductible. The only time the bonds are tax deductible is when the bonds are used to finance education.
Therefore, it can be said that government saving bonds are not tax deductible. However, the investor does not have to report the interest on the tax returns until he redeems the bond. But, the investor has the option of reporting the interest amount in his tax returns when he files it each year. In addition, as the bonds are issued by the federal government, the investor does not have to pay state or local taxes on the interest payment.
The accrued interest on the government saving bonds is taxed in the year the bonds mature, and that is why the interest must be mentioned in the tax form. However, investors can avoid paying taxes on the interest if they swap their I and EE saving bonds for HH saving bonds.
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