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.
There are 7 rules the goverment requires be forfilled prior to being able to qualify for education tax exclusion for US Savings Bond:
Qualified educational expenses include:
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)
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 2017
For 2017 the amount of interest exclusion is gradually phased out but AGI (adjusted gross income) can't exceed $93,150 for singles and $147,250 if jointly filing.
PLEASE CHECK WITH A TAX REPRESENTATIVE TO CONFIRM 2017 amounts, and IRS publication 550 for additional tax exclusion information.
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.)