You may be thinking to yourself, yeah TIPS are great during inflationary times, but what if our economy is going through a deflationary stage before the bond matures.  Will you still be able to make a guaranteed profit if prices go in the other direction?  Yes and Yes, With TIPS, the Treasury will pay you either the face amount or the inflation-adjusted amount when the bond matures, whichever is greater.  So in a deflationary environment, interest payments may be lower than you anticipated, but you'd still get back at least the full face value of the bond when it matures. 



Earnings from TIPS are exempt from state and local income taxes just as other US Treasury notes and bonds. TIPS owners pay federal income tax on interest payments in the year they are received and on growth in principal in the year that it occurs.  All TIPS distributions are taxes at ordinary income rates for the semi-annual payments and any additional income you receive due to inflation.  You won't actually get this inflated principal until the bond is redeemed, but you'll be paying tax on the adjustments annually.