Say my bonds are worth $3000 and the interest earned on them is $1100, bringing their total value to $4100. If I redeem them now, how much will I receive?
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You will owe federal income tax at your regular rate. The interest will not be subject to state income tax.
At the time of redemption, you pay the tax on $1,100 as ordinary income on the tax year of the redemption. Series EE holders could make an election to pay the tax each year on the increased value. If you did not make this election, you pay the tax on the net value increase of the bond.
You’d get the whole $4100. If your total income for the year, including the $1100 interest for the bonds, is under $5450 you don’t have to file a tax return and won’t owe any tax on the interest from the bonds.
None is withheld at the time you cash them. The bank will send you a 1099 Form in January reporting the interest.