When you cash in savings bonds to pay for qualified education expenses, you can exclude, or deduct, the interest from your gross income when you file your taxes. All series EE and I savings bonds sold after 1989 qualify for the education exclusion. You must meet certain criteria, however. And as you might expect, there’s also a form to fill out.
You can write off interest earned only for savings bonds you purchase beginning the month you reach your 24th birthday. The bonds have to be registered to you or to you and your spouse. Your child cannot be a co-owner, although she can be named as beneficiary on the bonds. You can claim this tax break when you use bond proceeds to pay college expenses for your children or grandchildren as long as you claim them as dependents on your tax return. You may also pay for your own or your spouse’s higher education costs. Qualified education expenses must be incurred in the same year you redeem the savings bonds.
Restrictions on Education Exclusion
You must use bond proceeds to pay for attending a postsecondary institution that meets federal standards for receiving federal student aid. Qualified expenses include tuition, fees and expenses required to complete required course work. Room, board and books are not counted as qualified costs. The Internal Revenue Service applies annual income limits. For example, if you filed as single in 2014, eligibility to claim the education exclusion started to phase out if your modified adjusted gross income reached $76,000 and dropped to zero if your MAGI topped $91,000. For a couple filing a joint return, the limits were $113,950 and $143,950, respectively.
Figuring the Exclusion
To claim the education exclusion, you must use the principal amount you invested to buy a savings bond, as well as the interest, to pay education expenses. For example, if you cash in a bond for $5,000, of which $2,000 is interest, you must use the entire $5,000 for college tuition or other qualified costs. You get to deduct the $2,000 interest. If you don’t use all of the proceeds of the bond or bonds you redeem, the amount of interest you deduct is prorated. Suppose you only use 80 percent, or $4,000 of the $5,000 bond proceeds, to pay for college. Only 80 percent of the $2,000 in interest, or $1,600, can be excluded. The remaining $400 is taxable income.
Claiming the Education Tax Break
Redeeming a savings bond to pay for higher education is a straightforward process. If the bonds are in electronic form, log on to your Treasury Direct account and follow the prompts to cash in the bond. To redeem paper bonds, take them to a bank, credit union or other financial institution. You will need to present a valid ID such as a driver’s license or passport. To take advantage of the education exclusion, you must use form 1040 or 1040A to file your tax return. Fill out IRS Form 8815 to compute the amount of your education exclusion and attach the completed form to your tax return.
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