The Cashing of HH Bonds and Taxation

Your HH bond pays interest every six months on the sixth and twelfth month anniversary of the date that it was issued. Your interest should be paid directly to your designated account through an American Clearinghouse (ACH) transfer. While the interest is free of state and local income tax, you will have to pay federal income tax on it.

You can only redeem an HH bond with the Treasury. To redeem it, sign the back of the bond and have that signature guaranteed by a bank officer. Once the bond is signed, make a copy for your records and attach it to a filled out form PD F 5396. You can send it to the Treasury's redemption address, which is printed on the form, or your bank can do it for you. Once the Treasury receives the bond, it will send your redemption proceeds to your account by direct deposit. It may, however, hold your bond for up to one month if you send it in close to a date when interest is due.

HH bonds are sold at face value and cannot be transferred or sold on the secondary market. This means that if you have a $500 bond, it cost you $500 and is worth $500 at redemption or maturity. As such, you won't experience any capital gain or loss when you redeem it. You won't have to pay any taxes on the bond's face value. You will, however, have to pay taxes on any interest that is included with your bond's redemption payment.

The Treasury offered a program where you could convert series E and EE bonds for series HH bonds. E/EE bonds worked by accruing interest without paying it out to you until you redeemed the bonds. If you converted E/EE bonds to HH bonds and carried deferred interest over, your HH bond will have a special note on its face to that effect. You will have to pay tax on the portion of your bond's face value that is made of up previously untaxed interest.