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How to Report I-Bond Interest Thumbnail

How to Report I-Bond Interest

Photo courtesy of Kelly Sikkema @ Unsplash

By Jon Aldrich

You have two choices as to When to Report the Interest

I have fielded a few questions in the last few weeks from clients asking if there is anything they need to report on their tax returns relating to the interest their I-Bonds are earning.

I have pounded the table on what the great deal I-Bonds have been the last couple of years and continue to be now that there is a Fixed Rate component of 1.3% in addition to the annual inflation amount for newly issued I-Bonds. However, we also should review how I-Bonds are taxed and what your options are for when to report the interest, as you do have two choices to consider. Of course, you may want to consult with your tax advisor about the optimal way to report the income.

Also, since I-Bonds now pay a fixed rate, in 2023 it is possible you cashed in I-Bonds purchased in the last few years without a fixed rate and re-purchased new I-Bonds with a fixed rate component. If you did this, you would have to report interest on your tax return in 2023 for the interest accrued for the whole time you owned the bonds (unless you were reporting interest as you go, as mentioned below). There are no capital gains with I-Bonds, only Federally taxable interest. There is also no state tax to report on I-Bonds.

Essentially you have two paths to go down in reporting interest earned from I-Bonds. The default method, which almost everyone follows and which I would recommend to most people, is to just report the interest in the year your I-Bond matures or the year you actually redeem the bond. Until the bond is either redeemed or matures, there is no interest or anything else to report on your tax return. It is very simple and as long as you have not redeemed any I-Bonds during the year, there is nothing to report on your tax return.

The second method is to report interest each year you own the bond even though you have not actually received the interest. This takes a little more work, but in some situations may be the preferred method, for example, those in low-income brackets may find it advantageous to report the tax in the lower bracket each year instead of waiting until it matures and possibly being kicked into a higher tax bracket. 

Since almost everyone owns their I-Bonds through the Treasury Direct website, I will focus on how things operate on the Treasury Direct website. As I mentioned, you will not get anything from Treasury Direct when you purchase bonds, or as you continue to hold the bonds through the years. Everything is on the website.

You also will not receive anything in the mail from Treasury Direct in years you actually do redeem I-Bonds or they mature. You will need to go directly to the Treasury Direct site to obtain the 1099-INT tax form to complete your taxes. Below is a detailed look at both methods:

Deferring until you get the interest:

Most people put off reporting the interest until they actually get it, and this is what I recommend to almost everyone, unless your tax advisor has suggested otherwise.

You will have to download a Form 1099-INT for the year in which you get the interest. (INT stands for "interest." The 1099-INT tells you how much interest the bond earned over the time you owned it.)

  • If your bonds are in your TreasuryDirect account, your 1099-INT is available in your account by January 31 of the following year.
    • Go to your TreasuryDirect account.
    • Select the ManageDirect tab.
    • Under "Manage My Taxes", choose the relevant year.
    • Near the top of your "Taxable Transaction Summary", choose the link to view your 1099. Video

NOTE: Your "Taxable Transaction Summary" is NOT your 1099.

Source: Treasury Direct

Paying Interest each year even though it has not been received:

It takes more work to report the interest every year on your tax return. Since you only get a 1099-INT from them in years your I-Bonds mature or are redeemed, you are on your own in calculating the interest to report each year. You will need to go to the Treasury Direct site and figure the value of the bonds at December 31st each year and manually calculate the interest earned each year to report on your tax return. There is not really anywhere on the site that shows your interest earned each year.

In the year(s) your I-Bonds are redeemed or mature, you will get a 1099-INT, but you will need to back out the interest already reported in prior years to get the correct amount on your tax return. Also, since the amount on your tax return will not match the 1099-INT you may end up getting a “Love Letter” from the IRS asking why the two amounts do not match. You will need to supply documentation to substantiate the difference if you get a tax notice.

Since there are a lot of ways this can go “off the rails” I really do not recommend paying the interest each year unless the tax advantages of doing so make this worthwhile.

A Few Other Observations About I-Bonds:

  • You cannot purchase I-Bonds in an IRA, only taxable accounts.
  • If I-Bonds are redeemed and used to pay for undergraduate, graduate, or vocational school tuition and fees for you, your spouse or your dependent, the interest can be tax free. (Room and Board does not qualify for this exclusion) However, the income levels (Adjusted Gross Income-AGI) in 2024 for this benefit phase out at $145,200 for married filing jointly and are eliminated when AGI reaches $175,200. For singles this phaseout begins at AGI of $96,800 and is completely phased out when AGI reaches $111,800. You would use form 8815 to report and exclude any I-Bond interest used for higher education.
  • Grandparents can only get this tuition exemption if they can claim the grandchild as a dependent. 
  • If you gift the I-Bonds you already own to someone, you would pay the interest due in the year of the gift.

All in all, reporting I-Bond interest can be relatively simple for the vast majority of people, as interest is only reported for tax purposes in the year they are redeemed or mature. However, you will need to go to the Treasury Direct website to obtain a 1099-INT to get the amount of interest to be claimed in the year it is reported as one will not come in the mail.

If you are just reporting the interest when bonds are redeemed, this is all very simple, it only gets complex if you choose to claim interest income every year you own the bond.