The U.S. tax code includes a special exclusion for savings bond interest used to pay for higher education. If the proceeds from redeemed, qualifying series EE savings bonds are used to pay higher education expenses, the interest earned on the bonds will be tax-free. This feature makes EE savings bonds one choice for college education savings.
Qualifying EE Bonds
To qualify for the education exclusion, the registered owner of the bonds must have been at least 24 years old when the bonds were purchased. The owner of the series EE bonds can use the proceeds to pay for his or his children's higher education expenses. The bonds can be registered jointly by a husband and wife. To qualify for the education exclusion and pay for the higher education expenses of a child, the bonds cannot be in the child's name. A parent buying savings bonds as a college savings plan must keep the bond in the parent's name.
Income Limitations
To qualify for the savings bond tax exclusion, the taxable income of the bond owners must be under certain limits. As of April 2011, the IRS had not published the limits for 2011. In 2010, for a single taxpayer, the tax exclusion of savings bond interest started to be excluded at an income of $70,100; all of the bond interest would be taxable if the bond owner's income exceeded $85,100. For bond owners filing taxes as married, filing jointly, the interest exclusion started phasing out at $105,100 and was gone at $135,100.
Tax Exempt Bond Interest Exclusions
The income limitations for the series EE savings bond education exclusion are applied in the year the bonds are redeemed and the proceeds used to pay for qualifying education expenses. The income limits are increased each year. From 2009 to 2010, the limits were increased by $150, to $250. For married couples, the income tax exclusion from savings bonds can only be taken if a married, filing jointly filing status is used. The IRS Form 8815 is used to claim the interest exclusion.
Alternative Plan With EE Savings Bonds
The TreasuryDirect website notes that if the income levels of a child's parents are too high to qualify for the education tax exclusion, an alternative is to put bonds in the child's name. When the bonds are redeemed to pay college expenses, the interest income will be taxable to the child. If she has no other significant income, the interest from the redeemed series EE savings bonds could be taxed at a very low or no tax rate.
Tags: savings bonds, education exclusion, education expenses, higher education, savings bond