Subject: Bonds - U.S. Savings Bonds for Education

Last-Revised: 4 Jan 2006
Contributed-By: Jackie Brahney (info at savingsbonds.com)

You can use your U.S. Savings Bonds towards your child's education and exclude all the interest earned from your federal income. This is sometimes known as the Tax Free Interest for Education program. Here are some basics on how the Education Savings Bond program works.

You can exclude all or a portion of the interest earned from savings bonds from your federal income tax. Qualified higher education expenses, incurred by the taxpayer, the taxpayers spouse or the taxpayer's dependent at a institution or State tuition plans (see below) have to incur in the same calendar year the bonds are cashed in.

The following qualifications and exclusions apply.

1. Only Series EE or I Bonds issued in 1990 and later apply; "Older" bonds cannot be exchanged towards newer bonds.
2. When purchasing bonds to be used for education, you do NOT have to declare that at the time of purchase that will be using them for education purposes.
3. You can choose NOT to use the bonds for education if you so choose at a later date.
4. You must be at least 24 years old when you purchase(d) the bonds.
5. When using bonds for a child's education, register the bonds in your name, NOT the child's name.
6. A child CAN NOT be listed as a CO-OWNER on the bond.
7. The child can be a beneficiary on the bond and the education exclusion can still apply.
8. If you are married, a joint return MUST be filed to qualify for the education exclusion.
9. You are required to report both the principal and the interest from the bonds to pay for qualified expenses
10. Use Form 8815 to exclude interest for college tuition.

Here are a few frequently asked questions.

Does everyone in every income bracket qualify?

No. For tax year 2005, the interest exclusion is reduced for single taxpayers with a modified gross income of 61,200, and eliminated completely at incomes of 76,200 and up. For married couples who file jointly, the exclusion is reduced for incomes of 91,850 and eliminated completely at 121,850 and up. These income limitations apply to the year you use the bonds, and NOT when you purchase the bonds.

What Institutions Qualify for the Exclusion?

Post secondary institutions, colleges, universities, and various vocational schools. The schools qualify must participate in federally assisted programs (ex. They offer a guaranteed student loan program). Beauty or secretarial schools and proprietary institutions usually do not apply.

What are Qualified Expenses?

Tuition and fees, for any course or educational program that involves sports, games or hobbies, lab fees and other required course expenses that relate to an educational degree or certificate-granting program. These expenses must be incurred during the same tax year in which the bonds are cashed in. Note: Room/board expenses, books, and expendable materials (pens, notepads, etc.) do not qualify.

A bit of advice: when purchasing bonds that you think will be used for educational purposes, purchase them in small 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.)

Here are some resources on the web that can help.

• The Treasury Department's web site:
  http://www.savingsbonds.gov/sav/savedfaq.htm
• The bond experts at SavingsBonds.com:
  http://www.savingsbonds.com

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