Characteristics, Uses and Taxation of Investments - Series EE, HH and I Bonds
iv. Series EE, HH and I Bonds (savings bonds)
Among the most widely held forms of government debt, they have evolved over time and exist in several forms. Most often they are used to help pay for college or to satisfy other individual liabilities. These bonds were originally issued in 1935 to provide a secure instrument for investors of modest means and an additional source of funds for the Treasury. None of them is marketable (e.g. no secondary market exists in which they could be traded) or transferable.
- Series E and EE Bonds
- Series E (war bonds) - designed as a savings tool, they were sold as discounted bonds (75% of face value) and paid no annual interest. Interest was paid at redemption as part of the current redemption value. Unmatured, unredeemed Series E bonds accrued interest at a market-based yield or the applicable guaranteed minimum investment yield, whichever was greater. They were issued from May 1941 to June 1980 in denominations of $25, $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. They were issued in registered, non-transferable form.
- Series EE - the Treasury began issuing these from July 1, 1980 to replace the Series E. The rate changed from fixed to variable which was expressed as 90% of the five-year note. Since modified, the formula is still based upon a variable interest rate pegged to market rates, structured such that increasing interest rates benefit investors. These bonds are sold at one half of their face value (e.g. a $100 bond cost $50) and may be purchased with cash or through payroll deduction. Interest is taxed either at redemption or maturity only. Investors may make a tax election to recognize income from these bonds in the years prior to maturity. Parents with young children who have no other taxable income may wish to make such an election to create tax basis in the bonds. Investors may elect to defer interest on the bonds further by exchanging EE for HH bonds. The deferral would stop upon maturity or redemption of the latter class of bonds. Interest on EE bonds are excludable from gross income if bond proceeds are used to pay qualified higher education expenses (tuition and fees for taxpayer, spouse or dependents, includes rollover of savings bonds proceeds into either a Qualified Tuition Program (529 Plan) or Coverdell Education Savings Account (f.k.a. Education IRA)), subject to the satisfaction of the following criteria:
- The bonds are issued after December 31, 1989;
- Their recipient is at least 24 years old at the time of the bonds' issuance;
- The exclusion is phased out at higher income levels (modified adjusted gross income threshold);
- This exclusion is not available for married taxpayers filing separately.