Government/Agency debt instruments
Muni bonds- if they buy the bonds of another state, their home state may tax their interest income from the bond. While interest income is usually tax-exempt for municipal bonds, capital gains realized from selling a bond are subject to federal and state taxes.
Treasury notes - pay interest every six months. This interest is exempt from state and local income taxes.
How are Series E and EE bonds taxed?
Question: I cashed some Series E, Series EE and Series I savings bonds. How do I report the interest?
Answer: You may choose to report the interest on savings bonds as earned annually, or in the year the bonds are redeemed, disposed of, or mature, whichever is earliest. If you have not reported the increase in the redemption value of the bonds as interest annually, you must report all interest in the year the bonds are redeemed, disposed of, or mature, whichever is earliest.
If your total taxable interest for the year is more than $1500, you must complete Schedule B (Form 1040A or 1040), Part 1, and attach it to your Form 1040 or Form 1040A.
If your total interest is not more than $1500 for the year, report the savings bond interest with your other interest on the "Interest" line of your tax return.
Publication 550 / Page 8
Can you avoid paying tax on savings bonds used for higher education Expenses?
Who Can Cash In Bonds Tax Free? - You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions. You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return. Your modified adjusted gross income (MAGI) is less than the amount specified for your filing status. Your filing status is not married filing separately.
Publication 970 / Page 64
Figuring the Tax-Free Amount -
If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free. To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. The denominator (bottom part) of the fraction is the total proceeds you received during the year.
Example. In February 2014, Mark and Joan Washington, a married couple, cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. In 2014, they paid $7,650 of their daughter's college tuition. They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Their MAGI for 2014 was $80,000. $3,000 interest × $7,650 AQEE $9,000 proceeds = $2,550 tax-free interest They can exclude $2,550 of interest in 2014. They must pay tax on the remaining $450 ($3,000 − $2,550) interest.
Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually reduced (phased out) based on your MAGI and filing status. Claiming the Exclusion Use Form 8815 to figure your education savings bond interest exclusion. Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Attach Form 8815 to your tax return.
Can education savings bonds be contributed to a 529 Plan or Coverdell IRA?
Contributions to a 529 or Coverdell ESA are qualified expenses for excluding the interest on these savings bonds. The bondholder must still meet all the other requirements for excluding the interest if they contribute it to a 529 plan.
Who pays the tax on U.S. savings bond interest?
You may choose to report the interest on savings bonds as earned annually, or in the year the bonds are redeemed, disposed of, or mature, whichever is earliest. If you have not reported the increase in the redemption value of the bonds as interest annually, you must report all interest in the year the bonds are redeemed, disposed of, or mature, whichever is earliest.
What is the tax status of U.S. government securities and various government agency issues?
Tax-exempt obligation. - This is any obligation, including a bond, installment purchase agreement, or financial lease, on which the interest is excluded from income under section 103. Tax-exempt governmental obligation. A tax-exempt obligation that is not a private activity bond (see below) is a tax-exempt governmental obligation. This includes a bond issued by a qualified volunteer fire department under section 150(e).
Private activity bond. This includes an obligation issued as part of an issue in which:
● More than 10% of the proceeds are to be used for any private activity business use, and
● More than 10% of the payment of principal or interest of the issue is either (a) secured by an interest in property to be used for a private business use (or payments for such property) or (b) to be derived from payments for property (or borrowed money) used for a private business use. It also includes a bond, the proceeds of which (a) are to be used to make or finance loans (other than loans described in section 141(c)(2)) to persons other than governmental units and (b) exceeds the lesser of 5% of the proceeds or $5 million.
http://www.irs.gov/pub/irs-pdf/p4079.pdf
http://www.irs.gov/pub/irs-tege/teb2a03.pdf
What are Treasury Inflation Protection securities (TIPS) and how are they taxed?
Interest payments from Treasury Inflation-Protected Securities (TIPS), and increases in the principal of TIPS, are subject to federal tax, but exempt from state and local income taxes.
Two forms are used to report the taxable income earned from TIPS:
Form 1099-INT shows the sum of the semiannual interest payments made in a given year.
Form 1099-OID shows the amount by which the principal of your TIPS increased due to inflation or decreased due to deflation. Increases in principal are taxable for the year in which they occur, even if your TIPS hasn't matured, so you haven't yet received a payment of principal.
https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_tax.htm
What are Inflation-Indexed Series I bonds and how are they taxed?
A security that earns interest based on combining a fixed rate and an inflation rate.
Is savings bond interest taxable?
The interest that your savings bonds earn is subject to
federal income tax, but not to state or local income tax
any federal estate, gift, and excise taxes as well as any state estate or inheritance taxes.
Using the money for higher education may keep you from paying federal income tax on your savings bond interest. Using I Bonds for Education.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm
How is the transfer of savings bonds handled?
Ownership transferred - If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce.
Publication 550 / page 8-9
Transfer savings bonds to a trust?
Transfer to a trust - If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year.
Publication 550 / page 9