Understanding How Series I U.S. Savings Bonds Work

Series “I” Savings Bonds offer a variety of benefits. They:

• Are fully backed by the government
• Pay interest rates competitive with private companies
• Offer protection against inflation
• Generate interest that isn’t taxed by states
• Offer tax benefits for qualified college savers
• Can easily be redeemed

The interest on I Bonds is a combination of two separate interest rates:

• A fixed rate of return that remains the same throughout the life of the bonds.
• A rate that rises and falls with inflation. This rate is adjusted twice a year, based on the Consumer Price Index for the previous six months.
• Interest is credited on the first day of every month and compounded twice a year based on the date of issue.

A savings bond generates interest until it’s redeemed, or until it reaches maturity in 30 years, whichever comes first.

The interest is not taxed by state and local governments; however, it is subject to federal income tax. You have choices about when you pay the taxes. You can either:

• Wait until you redeem the bonds, or they reach maturity, whichever happens first or
• Report the interest annually on your tax return.

Generally, you can redeem your bond at most financial institutions after one year, on up to 30 years, when the bond matures. Although savings bonds are intended to be long-term investments, they can be redeemed during the first year under certain circumstances, for example if you live in area hit by a natural disaster.

If you redeem a bond within the first five years, you will lose the interest for the prior three months.

After five years, no penalty applies.

Taxpayers who use interest from their Savings Bonds to pay eligible higher education expenses could be entitled to exclude all or part of that interest from federal taxes.

They must meet certain qualifications for Tax Year 2012:

• Single taxpayers with modified adjusted gross income of $71,100 or less can take the full tax exclusion. The tax break is reduced as income rises above that amount and is eliminated altogether when income reaches $86,100.
• Married taxpayers filing jointly can take the exclusion if their adjusted gross income is less than $106,650. The tax break phases out above that and disappears at $136,650.
• The savings bonds must have been in the name of a taxpayer age 24 or older at the time they were issued. Married taxpayers must file jointly for the exclusion.

Keep records of your Savings Bond serial numbers, issued dates and Social Security or taxpayer identification numbers in a safe place.

If the IRS has already processed your refund but you haven't received your savings bond within the three week time period, please call the Savings Bond Processing Site at 1-800-245-2804 for assistance.

Savings bonds that are lost, stolen or destroyed can be replaced by the Bureau of Public Debt.

Claims must be sent in writing to the Bureau of the Public Debt, Parkersburg, West Virginia, 26106-7012 with a completed Form PD F 1048.