Interest Income

Interest is earned over 30 years. You do not have to report the interest income until you cash in the bond or it reached its final maturity, whichever comes first. When you do the interest is subject to federal income tax but exempt from state and local tax.
You cannot cash the bond in until 6 months of ownership. If you cash it in after you have owned it for less than five years you will forfeit 3 months of interest.
The Bureau of the Public Debt announced today that as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions.
This action, which supports the U.S. Department of the Treasury's goal to increase the number of electronic transactions with citizens and businesses, will save American taxpayers approximately $70 million over the first five years. But savings bonds, introduced in 1935, are not going away. Electronic savings bonds in Series EE and I will remain available through purchase in TreasuryDirect®, a secure, web-based system operated by Public Debt – where investors have been purchasing savings bonds, available 24/7, since 2002.

Interest earned on U.S. Treasury bonds is fully taxable for Federal purposes and reportable on IRS Schedule B, but not subject to state or local income taxes.

Generally There is no federal tax due on interest on bonds from states, cities, counties, possessions of the U.S. or the District of Columbia.
Generally, these same items have to be added back as income on the state return subject to state tax.

Original Issue Discount (OID) occurs when a long-term debt instrument is issued at a price that is lower than its stated redemption value. OID is the difference between the stated redemption price at maturity and the issue price of a debt instrument.
OID interest usually is found in debt instruments of bonds or notes. Generally, a 1099-OID slip is issued with the taxable amount included.
OID interest is reportable on IRS Schedule B. There are certain exceptions to the OID requirements, as well as situations when the OID slip may be ignored.
Speak to your local CPA or check IRS publication 1212 about the reporting of the 1099-OID on your tax return.

Interest earned on zero coupon bonds is treated as original issue discount (OID) and is taxed every year owned.
You will receive a 1099-OID slip reporting the taxable amount that is reportable on IRS Schedule B.

Municipal and state interest income is tax-free on your Federal tax return. Although you report it for informational purposes, it is not taxed.
Municipal interest is also not included as income if the municipal instrument originates from the state you are filing.
Out-of-state municipal bonds are not excluded on your state income tax return, only your Federal return.