As if it were not enough that United States savings bonds are backed by the full faith and credit of the federal government, it is possible to redeem them without paying income tax on the proceeds. The IRS has created an exclusion for savings bondholders who use bond proceeds for qualified educational expenses. To be sure the expenses are qualified, consult a tax or financial professional. Tax laws are revised regularly, and a professional will have up-to-date information.
1. Purchase Series I, E or EE bonds and hold onto them for at least one year.
2. Claim any tax filing status other than married filing separately.
3. Earn a modified adjusted gross income of less than $85,100 for single filing status, or $135,100 if married filing jointly or a qualifying widow(er).
4. Use the funds from the redemption to cover qualified educational expenses, such as tuition, fees, books and supplies, for yourself, your husband or wife or a dependent for whom you claim an exemption when you file your return.