Two types of U.S. savings bonds are currently available:

Interest deferral on Series EE bonds. Series EE Bonds dated May 2005 and after earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE Bonds are sold at half their face value. For example, you pay $25 for a $50 bond. The bond isn't worth its face value until it has matured. Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

Series EE bonds don't pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on Series EE bonds isn't taxed as it accrues unless the owner elects to have it taxed annually. If the election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, the election won't be made so that the benefits of tax deferral can be enjoyed, particularly since the income itself is only received on a deferred basis.

On the other hand, if the bond is owned by a taxpayer with little or no other current income it may be beneficial to incur the income in low or no tax years to avoid its inclusion in the future. This may be the case with bonds owned by children, although the “kiddie tax” may apply to children under 18, causing higher parental tax rates to apply to their income.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there is a procedure under which the election can be canceled.

If the election is not made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond, see below). The bond continues to accrue interest even after reaching its face value but at “final maturity” (after 30 years) interest stops accruing and must be reported (again, unless it was exchanged for a Series HH bond).

Series HH bonds. Before Sept. 1, 2004, owners of Series EE bonds could exchange them for Series HH bonds. Essentially, HH bonds offered the opportunity to defer EE bond interest for an additional ten years.

Series HH bonds pay interest semiannually by check at a variable rate set similarly to the rate on EE bonds. This interest is reportable when received.

However, if the interest on the EE bond or bonds exchanged for the HH bond had been deferred, the deferral continues until the HH bond is redeemed, matures, or is otherwise disposed of. HH bonds mature after ten years. HH bonds bear a legend showing how much of the issue price represents deferred interest.