What happens if a 1988 US Series EE Bond is cashed in without reporting interest annually?

If a 1988 US Series EE Bond is cashed in without reporting interest annually, the full amount is taxable because interest on Series EE Bonds is subject to federal income tax. When the bond matures or is cashed in, the accrued interest is considered ordinary income and must be reported on the taxpayer's income tax return.

In the case of bonds, the interest can be deferred until maturity or until the bond is redeemed, at which point the accumulated interest is typically fully taxable. Therefore, if no annual reporting of the interest was done, when the bond is eventually cashed, the entire accumulated amount, which includes the original purchase price plus all the interest earned, is taxable as ordinary income in the year of redemption.

The other options imply different tax implications that do not align with the rules governing the taxation of savings bonds. Hence, understanding that the complete amount becomes relevant for taxation underscores the significance of reporting interest accrued, even if it was initially deferred.