savings bonds

Education Savings Bonds

Education Tax Exclusion for US Savings Bonds

The savings bond education tax exclusion permits qualified tax-payers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE savings bonds and Series I savings bonds issued after 1989, when the bond owner pays qualified higher education expenses at eligible institutions.

Rules to Qualify for Education Tax Exclusion on Savings Bonds

There are 7 rules the goverment requires be forfilled prior to being able to qualify for education tax exclusion for US Savings Bond:

  1. Qualified higher education expenses must be incurred during the same tax year in which the bonds are redeemed
  2. You must be at least 24 years old on the first day of the month in which you bought the bonds
  3. When using bonds for your child's education, the bonds must be registered in your name and/or your spouse's name. Your child can be listed as a beneficiary on the bond, but NOT as an Owner or Co-Owner
  4. When using bonds for your own education, the bonds must be registered in your name
  5. If you are married, you must file a joint return to qualify for the exclusion
  6. You must meet certain income requirements - income requirements for education tax exclusion for US Savings Bonds - listed below
  7. Your post-secondary institution must qualify for the program by being a college, university, or vocational school that meets the standard for federal assistance (such as guaranteed student loan programs)

Qualified Expenses

Qualified educational expenses include:

  • Tuition and fees (such as lab fees and other required course expenses)
  • Expenses that benefit you, your spouse, or dependent for whome you claim an exemption.
  • Expenses paid for any course required as part of a degree or certificate-granting program.
  • Expenses paid for sports, games, or hobbies qualify only if part of a degree or certificate program.
The cost of books or room and board are NOT qualified expenses.

The amount of qualified expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other forms of tuition reduction.

You must use both the principal and interest from the bonds to pay qualified expenses to exclude the interest from your gross income. If the amount of elegible bonds you've cashed during the year exceeds the amount of qualified educational expenses paid during the year, the amount of excludable interest is reduced pro rata.

Example: Assuming bond proceeds equal $10,000 ($8,000 principal and $2,000 interest) and the qualified educational expenses are $8,000, you could exclude 80% of the interest earned, which would equal $1,600. (.80 x 2000 = $1,600)

Income Limits

The full interest exclusion is only available to married couples filling joint returns and to single filers. Modified adjusted gross income includes the interest earned under a certain limit in each case. These income limits apply in the year you use bonds for educational purposes, not the year you buy the bonds. Exclusion benefits are phased out for joint or single filers with modified adjusted gross income that exceeds the limit. Full instructions and limits are outlined on IRS Form 8815.

Income Limits for Tax Year 2016

For single taxpayers, the tax exclusion begins to be reduced with a $69,950 modified adjusted gross income and is eliminated for adjusted gross incomes of $84,950 and above.

For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $104,900 modified adjusted gross income and is eliminated for adjusted gross incomes of $134,900 and above. Married couples MUST file jointly to be eligible for the exclusion.

Advice from SavingsBonds.com on Education Bonds

When purchasing bonds that you think will be used for educational purposes, purchase them in smaller denominations. That way you won't have to cash in more bonds than are necessary to pay the current college tuition expenses. Remember, any excess monies you receive from cashing in some savings bonds that EXCEED the tuition bills, may create a taxable event when you file your federal tax return. (Savings Bonds are always exempt from State and Local/City taxes.)

Other Savings Bond Topics
Pay for College with Tax Free Earnings - Ted Franklin describes why the stock market, mutual funds, 529 and Coverdell Plans may be some of the worst places to invest your hard earned money
Taxes on Savings Bonds - can you avoid paying taxes on bonds? cash vs. accrual methods for reporting interest
The Crisis In Savings Bonds - an extensive, highly-researched, 28-page, full-color document with graphs and credible source notes
Tax-Free Savings Fund - learn how to setup a tax-free college savings account using US savings bonds


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