Savings Bonds and tax liability, make sure you understand the details
The US Treasury issues savings bonds and is considered a debt instrument (securities). These bonds help pay for the US Government’s budget needs, the government in essence “borrows” the funds from the bond purchaser. Most issues of savings bonds are low interest but are considered entirely safe.
There are two primary bond types, Series EE and Series I. Series EE Savings Bonds can be issued in lower face amounts such as $50. They are always sold at face value, and the interest is applied at the time of redemption. Series EE bonds are restricted to no more than $10,000 per calendar year, and you must hold the bonds for at least 5 years. The penalty for early redemption is no interest will be paid for the previous 3 months. After 5 years of ownership, full interest is available at redemption.
Series I Savings Bonds have an inflation feature. These bonds are sold at face value, but like Series EE bonds you can only purchase $10,000 in any one year. Series 1 offers a fixed rate and an adjustment in overall yield can be made if certain conditions apply. Also like Series EE, any redemption before 5 years can have a loss of interest penalty (last 3 months). After 5 years of 0f ownership, there is no penalty.
Tax liability is deferred on both series of bonds until the funds are accessed or the bond matures. Interest earned on savings bonds is considered ordinary income and is taxed as such when the funds are accessed.
More information can be found at www.treasurydirect.gov