Tax Advantages of Treasury Securities
Treasury securities are treated differently than other investments for tax purposes. These differences provide their owners with a number of tax advantages.
Series EE, Series E, and Series I Savings Bonds
Earnings on savings bonds are exempt from both state and local income taxes, while federal taxes can be deferred until the bonds are redeemed or reach final maturity, whichever comes first. This tax deferral applies to all interest earnings including the inflation adjustment on I bonds.
For parents of college-bound students, EE Bonds issued 1990 or later and I Bonds are included in the Treasury's Education Savings Bond Program, which allows the interest on those bonds to be excluded — completely or partially ― from federal income tax when the bond owner pays tuition and fees for higher education the year the bonds are redeemed. The owner of the bond must be at least 24 years old in the month the bond is purchased, and the child may not be listed as a co-owner on the bond.
Another tax-saving option is to buy savings bonds in a child's name. If the child's interest is reported annually, taxes can be eliminated on interest earnings during years when the child's income is low.
Bond owners who want to switch from deferred reporting of interest to annual reporting of interest must do so for all savings bonds they own. They must also report all interest earned up to the year of the change in reporting procedure. The bond owner must submit IRS Form 3115 if they later wish to change back from annual reporting to deferred reporting. The fee for Form 3115 is waived in these cases.
Note: Treasury will cease to offer Series HH Bonds after August 31, 2004.
Treasury Bills, Notes, Bonds, Floating Rate Notes (FRNs), and Treasury Inflation-Protected Securities (TIPS)
Owners of Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS) receive interest payments every six months. Owners must report the interest as interest income on the federal tax return for the year received. The inflation adjustment for TIPS is reportable each year, unlike the inflation adjustment for I Bonds. Interest from Treasury bills must be reported for the year the bill matures or is sold.
Owners of Floating Rate Notes (FRNs) receive interest payments every three months. On their federal tax return, owners must report this as interest income for the year it was received.
As with savings bonds, the earnings on Treasury bills, notes, bonds, FRNs, and TIPS are exempt from state and local income taxes.