U.S. Savings Bond Adjustment

U.S. savings bond adjustment is an adjustment in the current amount of interest income on a U.S. savings bond. In some cases, a taxpayer may have already reported a portion of the interest that was earned and must therefore reduce the current amount of taxable interest. Therefore, the reportable interest adjustment on a U.S. Savings Bond is allowed to avoid double taxation of the same income. This adjustment applies to all types of U.S. savings bonds.

Interest earned on Series EE and Series I U.S. savings bonds is taxed identically. Neither is subject to state or local taxes, but both are taxed at the federal level. This interest is also taxed through federal and state estate, gift and excise taxes. The interest is the amount that a bond can be redeemed for above the face value of the bond, which is its original purchase price. 

Owners of the bond can choose one of two methods of taxation. The most popular choice is to wait to pay the taxes until the bond matures, is cashed in or is transferred to another owner. In this example, if you owned a bond for 15 years, you wouldn’t pay a dime of tax on the interest until the bond is redeemed. A bond that reaches maturity and stops earning interest is automatically considered redeemed. Typically, the interest income must be reported on your taxes in the same year that you redeemed the bond.

The second taxation alternative is to pay the taxes every year as the interest accumulates. In this case, bond owners would report the interest to the Internal Revenue Service on their annual tax returns. The interest income is reported on Form 1099-INT. If you decide to report the interest income annually, you have to continue to report it yearly until the savings bond matures. When it does, you have to make the IRS aware that the interest has already been paid. If you don’t, the IRS will tax the interest earned on the bond as if you had waited until maturity.

To avoid being taxed twice on the interest income of a U.S. savings bond, the bond owner needs to retain copies of all federal income tax returns that showed the annual taxes were paid on the interest income. Also, any beneficiaries named by the bond owner should be aware of whether the bondholder plans to pay taxes annually or at maturity. That way, the beneficiary will not be unprepared for any taxes they may be responsible for should the bond owner pass away. Sometimes, savings bond owners may simply forget they were paying taxes annually on the interest income, and will mistakenly pay the taxes again upon the bond’s maturity. However, this mistake can be corrected.  The bond owner simply has to file an amended tax return to get the tax refunded.