If you earned any interest from Treasury Bills or Savings Bonds last year, and are subject to local or state income taxes, be sure note it on your tax returns! Interest from federal debt obligations such as these are subject to federal tax, but not state or local income taxes. Here are some tips and examples to make sure you file correctly and get all the money that’s owed to you.
First of all, you have to manually go and print our your 1099-INT forms from TreasuryDirect.gov, if that’s how you bought or sold the securities. Go to Manage Direct > Manage My Taxes > Year. It’s not elegant, but at least they provide it… (You can also try calling 1-800-943-6864 to request one be sent to you.) On your federal return, there should be nothing specific to note as they are fully taxable at that level.
If you use online tax software for your state/local income taxes, look very carefully for a question that asks if you need to make any adjustments to your federal income numbers, or if you have any interest from government obligations or debt. If you go to an accountant and they don’t know how to do it – fire them 😉
To find out the applicable lines on the paper forms, first locate your appropriate state tax form in PDF format. It might be a good idea to start with the most general all-encompassing form. Then run a search in Adobe Acrobat for “bonds” or “subtractions” or “adjustments”. You are basically looking for the area where you make adjustments to the federal income figure. You may be referred to a supplemental form. Visually skim for keywords like government bonds, savings bonds, treasuries, or treasury bonds.
California Example
- I’ll start with Form 540 [pdf], the most general form.
- See per the Form 540 instructions that “If there are differences between your Federal and California income or deductions, complete Schedule CA (540) – California Adjustments
- Per the Schedule CA instructions: On line 8 enter in column B (Subtractions) any interest from U.S. Treasury bills, notes, and bonds (and also most U.S. Savings Bonds).
- Finish the schedule, transfer the appropriate value to line 14 of Form 540, and now your California taxable income should ignore any government debt interest.
Oregon Example
- I started with Form 40.
- In the “Subtractions” area, I see Line 16 – “Interest from U.S. government, such as Series EE, HH, and I bonds”. This is where I put in the interest from T-Bills as well.
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You don’t have to report interest income on savings bonds yearly, unless you cash them out. (link is for series I but same rules for series EE). It’s an option, but I think it’s much easier just to use the “cash basis” option and report interest at the end of the term.
Andy by “end of the term” I mean “when you redeem the bills”
Yes, I should have been more clear. By earned I mean redeemed.
Here’s a kind of tax note about US savings bonds. I’ve kept a pretty big portion of my emergency fund in savings bonds for about 10 years (maybe a bit longer). Once past the initial holding period, they’re pretty liquid. I’ve deferred the taxes as is customary.
This year I found myself making an unexpected purchase and temporarily needed some money. I cashed about $6000 in savings bonds, which included $2000 in interest. Now I’ve bumped my income for the year and I’m going to owe extra income tax.
It never occurred to me that if I “needed” that money that the extra taxes might be inconvenient. Savings bonds are not as attractive now as when I bought mine because of the rule changes, but even more I think I want a “pay as you go” tax situation on emergency money so I don’t get dinged if I need my money.
I’m not going to sell my other savings bonds, but I am thinking that going forward my emergency fund may look like 1/3 money market, 1/3 treasury bills, 1/3 savings bonds. If I avoid emergencies that really tap me out, I’ll use the savings bonds to pay college expenses for my daughter in 12 years.
Capital gains on Treasuries are taxable by states. Say you have a higher interest 20 year Treasury and you sell it. The state of Oregon will want tax on the capital gain.
Daniel, you should keep in mind that a LOT of children receive savings bonds for birthdays/religious events when they are younger.
Therefore, the accrual method is a good option for them. Most parents don’t even think about it.
Paul: if you were responding to me, I had in mind 4 week T-bills, so taking capital gains and selling isn’t really a situation I’d land in.
Thanks Johathon. This helps me a lot when filing tax..
This says that I don’t need to report T-bill interest on my tax return since it’s nothing special. But don’t I need to report it as income? Where do I report it as income? It it part of the regular interest income, for example: should I add it to the amount I earned on my savings account?