Education Bond Programs

Remember when your kids were born and your relatives proudly presented you with savings bonds that you filed away and probably forgot about?  Well, if college is on the horizon, it’s a good time to dig them out and consider the potential tax and education benefits that might be a big financial help.

The U.S. Government has created an education tax incentive by permitting qualified taxpayers who invest in savings bonds to exclude from their gross income all or part of the interest paid upon redemption of the bonds? This education tax benefit may be employed only if the proceeds are used for qualified higher education expenses.  Series EE Savings Bonds and Series I Savings Bonds issued after 1989 are eligible for this unique tax and education benefit.

When you cash in the Series EE or Series I savings bonds under this special tax and education savings program, you may be able to exclude the interest from income provided you meet the IRS requirements explained below.

Qualified Education Expenses

These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption on your income tax return.

1. Tuition and fees required to enroll at or attend an eligible educational institution (note that qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program)
2. Contributions to a qualified tuition program (QTP)
3. Contributions to a Coverdell education savings account (ESA)

Adjusted Qualified Education Expenses

You must reduce your qualified tax and education expenses by all of the following tax-free benefits:

1. Tax-free part of scholarships and fellowships
2. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA
3. Expenses used to figure the tax-free portion of distributions from a QTP
4. Any tax-free payments (other than gifts or inheritances) received as educational assistance ? such as veteran’s educational assistance benefits, qualified tuition reductions, or employer-provided educational assistance
5. Any expenses used in figuring the American Opportunity Tax Credit, Hope Scholarship Tax Credit, or Lifetime Learning Tax Credit

Eligible Educational Institution

An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

The educational institution should be able to tell you if it is an eligible educational institution.  Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs.

Dependent for Whom You Claim an Exemption

You can claim a tax and education exemption for a person if you list his or her name and other required information on Tax Form 1040 (or Tax Form 1040A), Line 6c.  Your filing status cannot be ‘married filing separately’ to use this education tax benefit.

Modified Adjusted Gross Income (MAGI)

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. Your modified adjusted gross income (MAGI) must be less than $84,950 for single filers ($134,900 if married filing jointly or qualifying widow/er).

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