U.S. savings bonds are debt obligations of the United States government, and as such are one of the safest and most widely held securities you can own. U.S. savings bonds have some tax advantages, particularly at the state and local level, but tax deductibility is not one of them.
Series EE and Series I bonds are the only types of U.S. savings bonds issued by the Department of the Treasury as of 2012. Both types of bonds earn interest for 30 years. You can redeem your bonds at any time after one year, although you will have a three-month interest penalty if you redeem them prior to five years. There is no tax deduction for buying or holding U.S. savings bonds.
The interest on Series EE and Series I savings bonds accrues until you redeem the bonds. You have the option of reporting the accrued interest on your bonds each year and paying federal income taxes on that amount, or of allowing the interest to accrue on a tax-deferred basis until you redeem your bonds or they mature, whichever comes first. The TreasuryDirect website notes that paying current accrued interest on savings bonds held by minors might result in a lower overall tax liability.
The interest on all series of U.S. savings bonds is fully taxable on your federal income tax return, but is exempt from taxation at the state and local level. If you meet all of the Internal Revenue Service's requirements, you can exclude a portion of the interest earned on Series EE and Series I savings bonds purchased after 1989 from your income, provided you used that interest to pay for qualified higher educational expenses.
Individual Retirement Account
You can deduct the cost of buying U.S. savings bonds if you purchase them for your traditional IRA. The interest generated by savings bonds in your traditional IRA grows on a tax-deferred basis. All withdrawals from your traditional IRA are taxed as ordinary income at the federal, state and local level, regardless of how those funds were generated. You cannot take a tax deduction for purchasing savings bonds for your Roth IRA.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.