Do you have a young child or a grandchild and want to help their financial future? US Savings Bonds are a great idea. Before getting into the tax advantages, a brief explanation of the two types of savings bonds - EE series and I series.

The EE series bonds are guaranteed to double in 20 years regardless of the current interest rate. The current interest rate is 2.60%. Even though 2.6% is not enough to double the value in 20 years, the US government will pay double after 20 years.

The I series bonds have a current interest rate of 3.11% which is adjusted with inflation every 6 months.

Both can be purchased for as little as $25 with a maximum annual purchase of $10,000. The bonds will continue to pay interest until 30 years. If you want the money sooner, you can get it after five years without a penalty. You cannot cash it in before one year. You can cash it in between one and five years but there is a penalty of 3 months of interest.

Why are they a good tax deal? There are two reasons. If you own the savings bonds, then you can cash them without taxes in any year when you spend money on your child’s college tuition (assuming no other tax deduction or credit for the same dollars). Also, they are never taxable to the state — regardless of the state.

Another tax ploy is to put the savings bonds in your child’s (or grandchild’s) name. Here is a fun fact — you have the choice to pay the tax on the interest annual or when you cash in the bond. Children usually do not have any wages. The interest on the savings bond is considered “unearned income” as is bank interest and investment dividends. Children without earned income (like wages) can have up to $1,350 of unearned income before they have to file a tax return. The trick is to claim the income as taxable each year but the taxable income is below the $1.350 threshold (which adjusts for inflation). Therefore, no tax filing is needed. Then, when the child does have to file a tax return (likely due to a summer job), then they will claim the interest for that year. If their income is below the standard deduction (currently $15,750), then they can have $350 of interest before paying any taxes. When they head off to their adulthood adventure, they can cash in the savings bonds and will have very little taxable interest income.

Let’s look at an example (ignoring inflation so tax rates are the same as today, for simplicity):

A child is 2 years old in 2025. Grandparents buy a $1,000 EE series savings bond with 2.5% interest (for easier calculations). Parents also buy a $1,000 EE series savings bond.

Year 2025: interest is $10 for each bond or $20 total because it was bought around now, no tax due

Years 2026 - 2039: interest each year is $25 per bond or $50 total. Child was 3 - 16 with no other income.

Year 2040: Child is 17 and earns about $4,000 in a summer job. Below the standard deduction. Bond interest remains $50.

Years 2041 - 2044: Child is in school and earns between $5,000 and $15,000 each year. Interest is $50. Child also has bank interest of $30. All is below the standard deduction and unearned income limits, so no taxes due.

Year 2045: Child graduates from college and bonds reach 20 year maturity. They are guaranteed to double by then. Bonds are worth $2,000 each. Child cashes them in and uses them to help start life. Earns about $20,000 for the 4 months of work after graduating. Interest is $30 total (partial year since cashed out in August). Tax is $3 on the interest.

The result is $4,000 for the child. Only $3 of tax is paid on the $2,000 of interest.

It’s something to consider. But you MUST make the election with the first tax return to claim the interest each year.