Congress considers ending Savings Bond tax deferral

Friday, February 26th, 2010
Categorized as: Savings Bond newsSavings Bond taxes

According to an article by Frank Norris in today’s New York Times, In Tax Law, an Overdue Overhaul a Step, With Miles to Go, a bill introduced this week, called the Bipartisan Tax Fairness and Simplification Act of 2010 includes a provision to end the ability to defer taxes on U.S. Savings Bond interest.

From the article:

They also want to do things that will hit home for some readers of this column, like taxing fringe benefits and no longer excluding income earned abroad by American citizens. They want to end the deferral of tax on income from United States savings bonds, and to get rid of the deduction for moving expenses.

The bill reflects preferences of the two senators. Mr. Gregg is worried about capital formation and about reducing tax reasons for capital to flow to areas that might be less productive. Mr. Wyden wants to preserve progressivity and to assure that the tax breaks that remain are available to all.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On February 26th, 2010 Muffadal Attarwala said:

It seems like Congress favors foreign investments over domestic investments. I sure hope they don’t put a ceiling on the fixed rate for the I-bond.

On February 26th, 2010 david said:

not surprising.screw the little guy,again.

On February 26th, 2010 Steve said:

Where does it say so ? The Bill only references “State and local bonds”, not treasuries. Also Mr. Norris doesn’t seem to mention it in his article.

On February 26th, 2010 MP said:

Leave it to Washington to get the middle class. If they want to have some tax fairness, why don’t they close all the tax loopholes for corporations? They should tax them for their earnings world wide as well as off-shore entities, tax hedge funds fairly and so forth.

On February 27th, 2010 Steven said:


It’s outrageous that our government would consider killing the Savings Bond program by ending the deferral of Savings Bond interest.
As you pointed out in your book, Savings Bonds are the ideal foundational investment for the average American.

The NY Times article provides the following quote: “Mr. Gregg is worried about capital formation and about reducing tax reasons for capital to flow to areas that might be less productive.” What he means is that people should be forced to put their money into the stock market to support Wall Street.

In a response to a previous post of mine, you said “I think the real issue is that Wall Street doesn’t want the government competing with it by offering attractive investments to individuals. If it wasn’t clear before the financial crisis that government is the handmaiden of Wall Street, it’s clear now”. I think your response says it all, as far as where our government’s loyalty rests.

On February 27th, 2010 Tom Adams said:

Steve – I’ve highlighted the portion of the Norris article that mentions Savings Bonds in the text at the top of the page.

I haven’t read the actual bill (blush), so I’m totally dependent on what Norris said at the moment.

Tom Adams

On February 27th, 2010 Nik said:

Go to the NYT article then follow the link in pp. 12 :

The Wyden-Gregg Bipartisan Tax Fairness & Simplification Act of 2010

Individual Tax Credits, Deductions and Exclusions from Income Repealed
● Deferral of interest on savings bonds

Other Changes
Among other tax law changes, the bill will:
● Use chained CPI-U instead of the standard CPI-U to index parts of the tax code

On February 27th, 2010 Rick said:

I would opine that banking and other financial interests lurk behind this bill. What these people are obviously trying to do here is to make U.S. Savings Bonds appear to be an even less attractive investment vehicle to Joe Public. The reasoning then would follow that Joe Public will move his funds back into the banks and equity markets again.

On February 28th, 2010 david said:

this bill has a long way to go before it becomes law.truth be told who cares, savings bonds in the past few years have become poor investments.with the new roth guidelines tips are available to almost anyone.lets face it the bankers for years have railed against the saving bond program and have doomed the program with the help of treasury.

On February 28th, 2010 Nik said:

Correct me if I’m wrong, but if this bill passes …

1. If your income is close to the AMT threshold and
2. If your I-bond holdings are substantial,

it looks as if all of one’s accrued I-bond interest could be wiped out by the AMT tax rates.

On February 28th, 2010 Robert Ranlett said:

Although I agree that ending the interest tax deferral for Savings Bond is not a positive development, Savings Bonds still have a unique advantage for the typical saver in that they are not market based securities, which is a big advantage to those who redeem them prior to maturity. I also wonder if the interest tax deferral is ended will that result in higher interest rates for savings bonds since I thought that part of the rationale for their lower rates than comparible Treasury securities was their different and “more favorable” tax treatment.

On February 28th, 2010 Tom Adams said:

Nik – it’s not clear to me if they’re talking only about newly issued Savings Bonds, or if they’d also like to take away the tax-deferred status of Savings Bonds that have already been issued – which seems unlikely to me, but I’m naive. Have you seen anything that addresses that specifically?

Tom Adams

On February 28th, 2010 Jim Davis said:

At the VERY WORST they would be talking about future deferral.

To make retroactive interest immediately taxable would be an outrage of mammoth proportions, not to mention a breach of trust and contract.

On February 28th, 2010 Nik said:

No, I have not seen anything that addresses the tax-deferred status of Bonds already issued; it’s speculation on my part at this point. And I figure the gov’t needs all the money it can get these days.

On March 1st, 2010 Rosedala said:

Hello, would anyone know whether municipal bonds fall under “savings bonds” under this new law? Thank you!

On March 1st, 2010 Tom Adams said:

Rosedala – This isn’t new law. It’s just being considered.

Municipal bonds and Savings Bonds are entirely different things.

Interest earned by municipal bonds is typically exempt from federal income taxes. Interest earned by Savings Bonds isn’t exempt, but the income tax is deferred until you cash them.

(Savings Bond interest, like all federal interest, is also exempt from state income taxes if you fill out your state tax form correctly.)

Tom Adams

On March 1st, 2010 Rick said:

The federal government has been running a massively crippling deficit for years and the revenues coming in are probably the lowest on record since the Roosevelt administration. My best guess is that the federal government is moving for immediate payment on all federal taxes owed from the interest accrued on all outstanding U.S. Savings Bonds.

On March 1st, 2010 Robert McKenna said:

Better would be that accrued interest to 2010 becomes tax free, then taxable annually going forward.

Also should consider allowing tax free use for home purchase, medical expense, and disability, just as they do for education.

On March 1st, 2010 ronnie skinner said:

should i not buy anymore savings bonds or keep buying them

On March 1st, 2010 Jeff from Great Neck said:

Some of my recently purchased savings bonds will earn 0% for 6 months and 3.36% for 6 months for an annualized yield of 1.68%. The purchase limit is $10,000 ($5000 paper & $5000 Treasury Direct) down from a purchase limit of $60,000. So on this $10,000 investment I will earn $168 over 12 months and the Gov’t wants their tax money now instead of when the bonds are cashed in? For generations Americans have used savings bonds for savings and of course education. In the last several years our country has run into financial trouble because Americans borrowed and spent more than they could afford. Why would our Government change the tax benefit of savings bonds and discourage savings?

On March 2nd, 2010 Tom Adams said:

Ronnie – My best guess is that this law won’t pass. In that scenario you should keep buying them.

The next most likely scenario is that the law changes so that new Savings Bonds don’t get tax-deferral, but ones issued before the law passes do get it. In that case, you should buy as many of the current ones as possible.

The most unlikely scenario is that the law changes so that tax is due on all Savings Bond interest immediately. I just can’t see that happening.

Jeff – It’s important to realize that the low rates don’t just apply to Savings Bonds – they are across the board. The Federal Reserve is holding down interest rates to allow banks to recover from the dumb loans they made that will never be paid back. Keep in mind that what’s important in this country is banks and corporations, not individuals or families.

Tom Adams

On March 2nd, 2010 Mike said:

This legislation, when it passes, will put the football on the one yard line…with 99 yards left to go. The future for those of us who save is not good. Before all is said and done our government will drastically raise taxes, means test social security and Medicare, confiscate 401Ks and IRAs, immediately tax US Savings Bond interest, and then eventually default on those bonds (via the printing press). The only winners are those who have no net worth and live pay check to pay check.

On March 3rd, 2010 Bob Kraus said:

Savings Bonds earn interest. Is the government responsible for notifying each investor of the tax liability?

On March 3rd, 2010 Tom Adams said:

Mike – confiscate 401Ks and IRAs? Don’t you think you’re being a little over the top? I don’t see how those who have no net worth are ever winners. The people running big banks and big corporations are the winners so far.

Bob – I can’t tell if that’s a serious question or a rhetorical question, but I’ll play the bumpkin and answer it like it’s real. Currently, the 1099-INT reporting the interest to the IRS is issued when the bond is cashed. Presumably if the law passed the Treasury would have to come up with a way to send annual 1099s to owners of non-tax-deferred Savings Bonds. I don’t believe they have the information to send annual 1099s to current owners, so that’s yet another reason why it’s unlikely that the law (in the unlikely event it passed) would include Savings Bonds that have already been issued.

Tom Adams

On March 3rd, 2010 Mike said:

My wife and I have incomes that puts us in the bottom 50% of all wage earners….but our house and cars are paid for…..we have no debt…..and at age 52 we almost have enough savings to not work anymore unless we just want to. I’m sure there’s a lot more “stuff” that we could have purchased over the years….but for the life of me I can’t think of anything we could have purchased that would have brought us as much joy as the joy we have in knowing that we only have to work if we want to. I sure hope the Obama Adminstration expands the US Savings Bond program so folks like us can save even more money !!

On March 3rd, 2010 Bob Kraus said:

Tom you are not a bumpkin,I am not a lawyer, thank you for the answer. As I look at the proposal I see the massive logistical clerical effort needed to try to accomplish task. The government would need to create a lot of jobs in new offices to do this. Then they would have to pay POSTAGE to send out the notices. This does not sound cost effective. I hope they realize this and leave the savings bond program as it now is. I agree with you that it is unlikely. Thank you for the information and this website as a bond owner .

On March 4th, 2010 Tom Adams said:

Bob – I think you’re on to a very important problem with this proposal.

Tom Adams

On March 4th, 2010 Rick said:

Tom: According to the Treasury Circular Public Debt Series 1-80 & 1-98, these brochures specifically mention that the federal tax owed on the accrued interest of U.S. Savings Bonds may be paid in two distinct ways. One is the “Cash basis method” which means that the tax may be deferred until either the bond is redeemed or has matured. The other option is the “Accrual basis method” which means that the bondholder can elect to pay any tax owed on a yearly basis. On the surface then, it would seem that (some, most or all?) existing Savings Bonds would not be affected by the proposed new tax law. However, I have a few Series EE Patriot Paper Bonds and Series I Paper Bonds that are not imprinted with any reference to the terms and conditions specified in the 1-80 & 1-98 brochures. Instead, there is just a black band scrolled over that area of the bond. Does that mean that these particular bonds are subject to other terms and conditions unbeknowst to the bondholder? Moreover, are the terms and conditions with the electronic Savings Bonds identical to that of the paper Savings Bonds in regard to the tax deferral?

On March 4th, 2010 Tom Adams said:

Rick – When it comes to tax law, you’re better off referencing the IRS web site than the TreasuryDirect web site. And the IRS site makes it clear that the cash and accrual basis methods are available on all E, EE and I bonds. What it might or might not say on the Savings Bond itself would always be trumped by the IRS interpretation of the law.

The law revision under discussion here would essentially do away with what the IRS calls “the cash method,” but presumably only for new Savings Bonds.

Tom Adams

On March 6th, 2010 Larry Wasser said:

Changing the method of taxing interest on savings bonds will, for all practical purposes, end the savings bond program and force “savers” into the stock market &/or bank deposits. To demand immediate payment of taxes on interest earned in the past would be a flagrant breach of contract. Retirees, who have often depended on the savings bond program would be especially hard hit. This would add to the injury they have already sustained from zero interest rates. Retirees seem to have been singled out as targets of financial abuse and maltreatment by the Fed.


On March 7th, 2010 Larry Wasser said:

The IRS website says that taxation of interest on I & EE bonds may be paid when the bonds are redeemed. To change this would require a breach of contract.


On March 8th, 2010 Tom Adams said:

Larry – I suspect the Congressmen want to change the rules for new Savings Bonds, not for Savings Bonds that have already been issued.

Nonetheless, it isn’t a breach of contract when Congress changes a law.

Tom Adams

On March 8th, 2010 Larry Wasser said:

I suspect that you are correct about the rules applying to new savings bonds, but it seems to me that making the rules retroactive would be a breach of contract. I am not, however, a lawyer.


On March 8th, 2010 Tom Adams said:

Larry – I’m not a lawyer either, although sometimes I play one on the internet (smile).

Tom Adams

On March 8th, 2010 Rick said:

Tom: I would beg to differ but it obviously doesn’t take a rocket scientist to realize that there exists a massive shortfall in federal tax revenue coinciding with unimaginable federal deficits. In that respect alone, I really can’t fathom that these two senators would just tinker with newly issued Savings Bonds that would only yield pennies on the dollar to Uncle Sam. I suspect that these senators are going after the big fish; meaning retirees and others holding large amounts of U.S. Savings Bonds. If this were so and the proposed bill did become law, this would necessarily be a breach of contract which probably would invite almost certain litigation.

It doesn’t matter if it is Congress, the Treasury Secretary, the IRS commissioner or other agent of the federal government who suddenly amends the rules as per the tax deferral on the interest accrued on existing U.S. Savings Bonds. It all boils down to a breach of trust and contract either way you slice it.

On March 8th, 2010 Steve said:

Tom: Is it possible to use both methods (accrual and cash) on the same bond?

I’m thinking one would preferentially use the accrual method to defer taxes, but if finding themselves in a very low, or 0%, tax bracket in a given year it would be convenient to use the cash method for that year.

I couldn’t find anywhere where it says that once one begins to use a method they are stuck with it until bond redemption.

On March 9th, 2010 Tom Adams said:

Rick – You are mistaken to think that people who hold Savings Bonds are big fish in either the world or debt of the world of taxes. Savings Bonds make up a tiny, tiny percentage of both worlds.

Steve – It is possible to use both methods at different times. But in any given year you have to pick one method and use it for all of your Savings Bonds. My book (pages 160-162) gives an extensive example of the process for switching back and forth between the two methods.

Tom Adams

On March 10th, 2010 Jim Simpsom said:

There’s no way the Government would breach the trust of the owners of U.S Savings Bonds. It’s not like they said that if you purchase E/EE bonds, you can defer paying taxes on the interest even longer by exhanging the bonds for HH Bonds in 30 to 40 years. Oh wait, they did say that and they did breach our trust.

From the website:
“Notice: As of September 1, 2004, investors are no longer able to reinvest HH/H Bonds or exchange EE/E Bonds for HH Bonds.”

Existing bonds were not grandfathered in. The correct thing to do would have been to say that any EE Bonds purchased after September 1, 2004 are not elegible for exchange for HH Bonds.

On March 10th, 2010 Rick said:

Tom: This bill is now in the Senate Finance Committee. I have received very reliable word that no similar piece of legislation has yet been introduced in the House. To view the actual bill, go to and type in bill number S.3018.

On March 13th, 2010 Scott said:

I am wondering if this provision got dropped before the bill was actually drafted. If you search the text of the bill, there seems to be no reference to the deferral of interest of US savings bonds.

On March 13th, 2010 Larry Wasser said:

I have gone over Bill S.3018 repeatedly, and I have not located a reference to Savings Bonds.

Am I overlooking the appropriate section of the bill, or is it possible that the bill does not apply to Savings Bonds?

On March 14th, 2010 Douglas said:

Tom: Thanks for your website; it is a great informational resource. I want to encourage everyone who is concerned about this bill and the future of the US Savings Bond program to write (or at least email) their US Congressmen, especially their Senators, since this bill has been introduced to the Senate. Although the Senators’ replies did not indicate their preference for the bill, they did indicate that someone in their office read and understood my concern. You can find contacts for your elected officials at:
and the following website gives tips for writing concise, logical letters to Congress:

On March 16th, 2010 Douglas said:

Scott & Larry:

On page 70, lines 14 & 15, this bill states that “Section 454 (relating to deferral of tax on obligations issued at a discount).” IRC Section 454 establishes the rules for reporting interest income for Series E, EE and I savings bonds.

Did everyone also notice the provision to have 75% of state and local bonds taxed? (Page 20)

On March 16th, 2010 Tom Adams said:

Steve and Larry – Like you, I find no reference to “Savings Bonds” or to the Savings-Bond-relevant sections of “Title 31” (the part of the US Code that includes regulations related to Savings Bonds) in S 3018. But decoding Congressional bills is not my area of expertise, so I’m reluctant to say it’s been removed.

Tom Adams

On March 16th, 2010 Rick said:

Tom: I also did not find a direct reference to U.S. Savings Bonds in Bill S3018 but it sure appeared to me that they could have been included nevertheless under Sec.25E(c)(1): “Interest On State And Local Bonds: IN GENERAL- For purposes of this section, the term `State or local bond’ means any bond issued as part of an issue if the interest on such bond would (but for this section) be excludable from gross income under section 103.”

According to how this bill defined “State or Local Bond”, one could loosely interpret this as including “all” bonds in which the interest accrued would be excludable from gross income. Technically speaking, that would fit the description of current U.S. Savings Bonds as well since the interest accrued under the “Cash Method” is not included with gross income unless the bond was redeemed or has matured.

On March 16th, 2010 Elaine said:

I found this article after reading bill S.3018 that gives a link to Senator Wyden’s website and “offset handout” metioning the deferral of interest on Savings Bonds. The handout list the issue, but no details are given.
This article also gives credit to Savings Bond Advisor Blog.

On March 17th, 2010 Larry Wasser said:

Thanks for your careful research. I have faxed both Illinois senators regarding my concerns. Fax is probably the best way to be sure that a message actually reaches the senator. Do you think that IRC section 454 will be changed to require immediate payment of interest accrued to date? For me that would be a financial disaster.


On March 17th, 2010 Larry Wasser said:

One more thought on this issue. If the part of the bill relating to deferral of taxation of interest on Savings Bonds is passed, I think we should be very proactive and try to interest a good lawyer in filing a class action suit on our behalf. To change the current law regarding this issue would be a flagrant breach of contract and a violation of trust. Proposals such as the change in Savings Bond interest taxation further support the widespread loss of trust in our government.


On March 19th, 2010 Douglas said:


I have absolutely no idea if the proposed bill will be retroactive or only apply to newly issued bonds. However, I think this bill has an uphill battle, as it appears to be skewed towards higher income earners, including reduction of the top tax bracket (permanent change to the lowest 35%, instead of letting it expire & raise back up to 39%) and reduction of corporate tax rate. Despite the low income sweetener of a tripling of the standard deduction, the bill also proposes the removal of several lower tax brackets (10%, 28%, & 33%) and removal of some fringe benefits deductions, so I think there will be strong resistance to the bill. I guess only time will tell.

One other point I didn’t notice before. The bill includes a change from the standard CPI-U to chained CPI-U for “certain portions of the tax code”. This could potentially affect the rates on I-bonds, as chained CPI-U numbers are consistently lower than standard CPI-U numbers by as much as 0.5%. No idea on the ultimate effect, but since it is designed to “offset” the tax incentives, I’m guessing it will lower the inflation rates.


On March 19th, 2010 Tom Adams said:

Doug – A change to chained CPI-U would have an impact on things like the annual increase in the income limits on the Savings Bond college education deduction and on the annual changes to the tax brackets themselves, but the regulations relating to I bond rates aren’t part of the tax code.

Tom Adams

On March 23rd, 2010 Larry Wasser said:

22 ‘‘The following provisions shall not apply to taxable
23 years beginning after December 31, 2010:

This section of Senate Bill S.3018 would seem to indicate that if the bill is passed, only new savings bonds will be subject to loss of deferral of interest taxation.


On March 23rd, 2010 Carolyn said:

I have a substantial amount of inherited money in US savings bonds (Series EE) which mature in 2017. I am now starting to withdraw a few so my tax burden when they mature will be less painful. As an owner of these bonds, I would never suggest to anyone to buy bonds. First off, it is nearly impossible to find a bank that will cash them. When you do, it is only a certain amount they will cash (usually under $5,000). Establishing an account to convert them from paper to electronic takes forever and still requires mailing the bonds to them. The frustrations dealing with savings bonds is not worth the small amount of interest gained on the bonds. As far as I’m concerned, they can do away with the entire US Savings Bonds program. Seeing the possibility of doing away with deferred interest doesn’t surprise me. This is an archaic system that needs complete overhaul. Tom, thanks for your website, I have found some very useful information here, unlike the government’s site.

On March 24th, 2010 Tom Adams said:

Carolyn – if you think the web site is helpful, you should spend a weekend reading my book.

The modern system you’re looking for is TreasuryDirect. Once your bonds are converted to that system your problems will go away.

Tom Adams

On March 27th, 2010 Ted Turner said:

What should a little tax change matter? Really, I promise to keep funding the government’s runaway spending by buying I-bonds, even if they do take away the tax break. I’ll buy them anyway, because the tax-favored status has had nothing to do with my decision to buy government bonds at a low coupon, instead of investing in higher-risk, but higher reward inflation-proof investments that don’t enjoy tax-favored status.

On March 28th, 2010 Robi Zocher said:

Carolyn, while I rarely argue FOR a government run program being exceptional, I have to defend TreasuryDirect and the Savings Bond program.

It isn’t perfect, but using TreasuryDirect is fairly seamless, and if you do need assistance, and you contact them via email, someone from TreasuryDirect will get back to you within a day’s time. Sending in bonds for conversion is very straightforward, and making automatic bond purchases online couldn’t be easier.

The whole annual limit concept makes no sense (why not $10,00 online OR $5,000 paper and $5000 online OR $10,000 paper-buyer’s choice) and the I Bond interest rate/ fixed rate computations get a bit tricky, but, really, for a very safe place to stash a portion of your portfolio, it really can’t be beat.

Convert your bonds, it’s easy, and then cash them in online.

On March 29th, 2010 Tom Adams said:

Ted – Could you give us some actual examples of the kind of higher-risk, but higher reward inflation-proof investments you prefer? Perhaps the stock market?

Tom Adams

On April 6th, 2010 Scott said:

Douglas – Good catch on the IRC Secion 454, but would this not be interpreted to only apply to EE bonds, as it refers to “deferral of tax on obligations issued at a discount”? Since I-bonds are not issued at a discount, it would seem this would not apply to them….?

On April 12th, 2010 Douglas said:


I am not a lawyer nor a tax accountant, so I don’t know specifically what the legalese means. I do understand politics just enough to know that you have to look behind the covers a little to see all the repercussions of a given congressional bill. Let’s hope that the bill is defeated and the exact meaning is moot.


On April 15th, 2010 Scott said:

Douglas –



Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on I will contine to update the main articles on this site, but not the comments.

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Tom Adams

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