Millions of Americans own U.S. savings bonds. They are a safe and generally tax-efficient investment. Let’s discuss some of the federal tax rules… With a primary focus on EE and I bonds. Interest on the bonds is generally tax-deferred. The interest is reported as taxable income on the 1040 in the earlier of the year the instruments mature or when you cash them in. Alternatively, taxpayers can opt to report the increase in redemption value as taxable interest each year. No matter which method you choose, all bonds must be taxed the same way. Holders of HH bonds report and pay U.S. tax on interest annually as it is paid to them. Interest on U.S. savings bonds is exempt from state and local income taxes.