The Internal Revenue Service considers any income you receive during the year to be taxable income unless it is specifically exempted from taxation by federal law. This includes any interest you earned on your savings and investments. Some interest, such as interest on most municipal bonds, is exempt from federal income taxes. The interest on most other savings and investment securities, including United States Treasury securities, is fully taxable on your federal income tax return.
U.S. Treasury securities are debt obligations of the federal government. These securities are backed by the full faith and credit of the United States, and the U.S. Treasury has never missed an interest or principal payment on its debt obligations. U.S. Treasuries are considered among the safest of all investments. Common types of U.S. Treasuries include Treasury bills, Treasury bonds, Treasury notes, Treasury inflation-protected securities and U.S. savings bonds.
State Tax Exempt
The interest from U.S. Treasury securities is fully taxable at the federal level, but it is exempt from state and local income taxes. This can provide a significant tax break for investors who live in states that assess an income tax. This provision might be less important if you live in an area that does not impose a state or local income tax.
Earnings on securities held in your Roth IRA, including the interest on U.S. Treasuries, are allowed to grow tax-deferred. You can withdraw those earnings without a tax liability at either the state or federal level once those earnings become qualified. This typically occurs after you have held a Roth IRA for at least five years and after you reach age 59 1/2.
Series EE and Series I U.S. savings bonds give you the option of paying taxes on the interest in the year it is earned, or deferring paying taxes until the bonds mature or your cash them in. You might be able to exclude the interest from your savings bonds from federal income taxes altogether, if you use the interest from your savings bonds to pay for qualified expenses for higher education. The IRS has a number of other requirements that you must meet before you can claim this exclusion, including limits on your modified adjusted gross income, marital status and age at the time you bought the bonds.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.