Do You Have To Pay Taxes on Treasury Bills?

As Tax Day, Apr. 15, 2024, rapidly approaches, you might be nervous about taxes on some of your investments. Will the new federal income tax brackets affect your tax refund or what you owe? Should you take advantage of common tax deductions by itemizing your tax write offs? How long does it take to get a tax refund?

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If you have investments, you might be wondering, do you have to pay taxes on Treasury bills?

The short answer is, yes, you have to pay federal taxes on interest you earn from Treasury bills. However, Treasury bills are exempt from state and local taxes.

What Are Treasury Bills?

A Treasury bill is a short-term, government-issued security that earns interest. You can buy Treasury bills through Treasury Direct, an online system created by the federal government to make it easy to buy and sell U.S. Treasury securities, including bills, notes, and bonds. You can also buy Treasury bills, or T-Bills, from independent brokerage sites like Public.com or from a bank.

Treasury bills range in terms from four weeks to 52 weeks, with common maturity dates of four weeks, eight weeks, 13 weeks, 26 weeks and one year. You can buy them in increments of $100. Treasury bills have an average interest rate of 5.4% right now, according to FiscalData.Treasury.gov.

You can sell a Treasury bill at any time, but, as with CDs, you’ll lose out on interest if you sell the bill before it matures.

Treasury Bonds vs. Treasury Bills: What’s the Difference?

Treasury bonds are not the same as Treasury bills. U.S. government-issued Treasury bonds are long-term investments that pay a fixed rate of interest every six months until the bond reaches maturity.

Traditionally, Treasury bonds, with terms of 20 or 30 years, paid higher interest rates than shorter term Treasury bills. But that has changed in recent years. Recently, a 1-month Treasury bill can earn a yield of 5.39%, while a 30-year Treasury bond earns just 4.41%.

T-bills also have another benefit; you don’t have to pay taxes on the interest earned until you sell a Treasury bill. U.S. Treasury bonds, on the other hand, accrue interest every six months and you must pay federal taxes on that money in the year it was earned, even if you haven’t cash in the bond.

Like T-bills, Treasury bonds are exempt from state and local taxes, making them both a good investment choice in states with high tax rates.

How Much Tax Do You Have To Pay on Treasury Bills?

When you sell a T-bill, you should receive a form 1099-INT from the federal government indicating the amount of your interest earnings. Those earnings are added to your gross income, which is your total income before FICA tax is taken out and before any deductions, credits, or exemptions. However, you don’t have to pay taxes on that total amount.

You will pay taxes on T-Bill interest at your marginal tax rate, which is shown in the IRS tax tables for 2023. IRS tax brackets range from 10% up to 37%. Your marginal tax rate is the highest tax bracket encompassing your adjusted gross income. That is, the amount of earnings minus taxes already paid and allowable deductions or income exemptions.

For instance, if your adjusted gross income is $95,000, your marginal tax rate is 22% for the 2023 tax year. Interest income from any T-bills will be taxed at that rate.

Interest from T-Bills is taxed the same as other investments held less than a year, at the short-term capital gains tax rate. You don’t gain any specific tax benefits by investing in T-bills, other than the advantage of not paying state and local taxes.

On the other hand, if you invest in stocks and hold them for more than a year before selling at a profit, you may pay a lower tax rate, depending on your income. Federal long-term capital gains tax for 2023 is either 0%, 15%, or 20%, depending on your taxable income.

Can You Avoid Taxes on Treasury Bills?

Any interest income from Treasury bills must be reported to the IRS, whether or not you receive a 1099-INT form. You can’t avoid adding your T-bill earnings to your taxable income.

However, there are other ways to reduce the amount of taxes you owe, which could lead to a tax refund rather than a bill in April. To minimize your tax liability, make sure you take advantage of any credits and deductions that you qualify for.

Depending on your tax situation, it might be best to speak to a tax professional who can ensure you’re claiming all the credits and deductions you deserve. A tax advisor can also help you minimize your tax liability next year by pointing you in the direction of tax-advantaged investment accounts.

Bottom Line

If you earned interest from Treasury bills last year, you’ll need to claim that income on your tax returns in 2024.

FAQ

• How much are Treasury Bills taxed?

  • Treasury bills are taxed at your marginal tax rate, which can range from 0% up to 37%.

• Are Treasury bills better than CDs?

  • Treasury bills have certain advantages over CDs, including higher interest rates for shorter terms right now. However, if you are looking to lock in a higher rate for five years or more, you may want to consider certificates of deposit. Interest from T-bills and CDs are taxed at the same rate, so you won't gain any tax advantages by choosing a longer-term CD. However, you'll be able to lock in a higher interest rate for 10 years or longer with a CD.

  • Since the U.S. Federal Reserve is contemplating cutting the prime rate in 2024, locking in a long-term CD could help you maximize your investment income.

• Should I put money in Treasury bills?

  • Treasury bills represent a secure investment that won't keep your money locked up for decades. If you have a short-term savings goal and want to find a return of 5% or above, T-bills could be the answer. T-bills typically offer a greater return than a savings account. Right now, T-bills also offer slightly higher returns than short-term CDs. T-Bills can be a smart short-term investment as part of a diversified portfolio.

Information is accurate as of Feb. 28, 2024.

This article originally appeared on GOBankingRates.com: Do You Have To Pay Taxes on Treasury Bills?