Redemption

• When you redeem a U.S. savings bond, you will receive the original amount you paid for the bond plus the interest the bond has earned. Your state tax authority cannot claim taxes on these, but you will have to report the bond as income on your federal taxes.
  
  

Inheritance

• If you receive U.S. savings bonds through inheritance, the amount you receive may be subject to any state inheritance or estate taxes. Inheritance is an exception to the rule and the only instance in which states can claim taxes from savings bonds.
  
  

Education

• You may be able to avoid paying federal taxes on U.S. savings bonds if you use the bonds to pay for educational expenses. You must use the bond to pay for you or your dependents' tuition and fees at an accredited university or college and make less than $70,000 (in 2010, the threshold changes annually).
  
  

Reporting

• You can either report interest from bonds as a lump sum once you redeem the bond (which is what most people do) or report the interest accrued annually, which lessens your tax burden once you redeem the bond but involves more effort, paperwork and reporting.