The accrued interest on Series EE bonds is subject to federal income tax. It is not subject to state income tax. EE Bonds don’t make interest payments, instead, the accrued interest is reflected in the redemption value of the bond. The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest must also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.
If the election isn’t made, all of the accrued interest is taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.
If you use the money for higher education expenses, the interest may be not be taxable.
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