J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.15 I Bonds

Treasury “I bonds” provide a return that rises and falls with inflation. I bonds may only be purchased online from Treasury Direct at www.treasurydirect.gov . They earn interest for 30 years. Interest is added to a bond monthly and paid when the bond is redeemed.

I bonds are not redeemable within the first 12 months. You forfeit three months of interest if an I bond is redeemed within the first five years, the same rule as for EE bonds (30.14).

Rates.

Interest on an I bond is determined by two rates. One rate, set by the Treasury Department, remains constant for the life of the bond. The second rate is a variable inflation rate announced each May and November by the Treasury Department to reflect changes reported by the Bureau of Labor Statistics in the Consumer Price Index. If deflation sets in, a decline in the Consumer Price Index does not reduce the redemption value of the bond, even if the deflation rate exceeds the fixed rate.

Income tax reporting.

Investors may defer paying federal income taxes on I bond interest, which is automatically reinvested and added to the principal. Deferral applies to the fixed rate interest as well as the variable inflation rate interest. You may defer federal tax on the interest until you redeem the bond or the bond reaches maturity in 30 years (4.29). You may report the interest each year as it accrues instead of deferring the interest. I bond interest is exempt from state and local income taxes.

If an I bond is redeemed to pay ...