Savings bonds are a simple way to invest without taking on much in the way of risk. Over time, the bonds mature, providing holders with a small return in the form of interest. There is sometimes confusion regarding the payment of taxes on savings bonds. In fact, it is necessary to report the income earned from the bonds to both state and federal tax agencies and account for that income when filing tax returns.
One important aspect of paying taxes on savings bonds is that there is no need to report the income until it is actually realized. In most cases, this means at the point the bond matures. Some consumers are under the impression that the responsibility of reporting the income arises only once the bond is cashed out and the generated interest is in hand. That is incorrect and the bond interest earned should be reported during the year in which the bond matures, even if the bond is not cashed out until a year or two later. There is no benefit to waiting, since savings bonds typically stop accruing interest on the maturity date.
In the event that the bonds are sold for some reason, the original owner will need to file a form that effectively transfers the holding to the new owner. This process helps to create a document trail that substantiates when the bond was sold, for how much, and whether or not the seller earned any returns above and beyond the purchase price associated with the bond. If so, there may be a need to report that additional income on state and federal tax returns, making it possible to pay taxes on savings bonds sold at a profit during a specific tax period.
While taxes on savings bonds must be reported to the federal tax agency, the income may or may not be taxable at the state level. In order to determine if state taxes on savings bonds are due, residents should contact the revenue agency in the state where they reside. A state tax agent can advise residents on how to go about reporting the income generated from the bonds properly, making it easier to pay whatever taxes may be owed on that interest income.
Taking care to report earnings and pay taxes on savings bonds during the year in which the bonds mature is very important. Depending on the total amount of income involved, those returns could be enough to significantly alter the amount of taxes due for the period. When this is the case, reporting the income during a later period could result in the need to file an amended return and incur the assessment of late fees and penalties.