# How I Bonds Get Taxed: What You Need to Know
I bonds come with specific tax rules that differ from regular savings accounts and most other investments. Understanding when and how you owe taxes on these Treasury securities matters for your overall tax planning.
I bonds earn interest through two components: a fixed rate set at purchase and a variable rate that adjusts every six months based on inflation. The interest compounds semiannually, but you don't receive payments. Instead, the bond's value grows.
The federal tax treatment depends on how you report. You can choose to report interest annually as it accrues, or defer all taxes until you redeem the bond or it reaches final maturity at 30 years. Most people elect to defer. When you cash in the bond or it matures, you owe federal income tax on all accumulated interest in that single year. State and local taxes don't apply to I bond interest, a key advantage over taxable savings accounts.
Timing matters strategically. If you're in a lower tax bracket during retirement, delaying redemption until then reduces your tax bite. Someone earning $100,000 now might fall into a lower bracket after retiring, making a bond redemption at that point more tax-efficient.
I bonds purchased before May 1995 offer another option: use them for qualified education expenses and you may exclude the interest from federal taxation entirely. For bonds purchased after that date, the education exclusion applies only if the owner is the taxpayer, their spouse, or a dependent claimed on their return. Distributions must pay for tuition, fees, and room and board at an eligible school.
One catch: you must redeem education I bonds the same year as the qualifying education expense to claim the exclusion. Timing coordination is essential.
For estate planning purposes, unpaid interest on I bonds transfers to heirs at your death, and they inherit your