| If you invest in U.S. savings bonds, you are generally obligated to pay federal income taxes on the interest earned on the bonds. If you do not include the interest in your gross income in the year in which it was earned, you must include it in the year in which you cash in the bonds. However, if you use the proceeds from certain bonds as part of an education savings bond program, you may be entitled to exclude the bond interest in income.
In order to exclude the bond interest from income, the bonds must be either series EE U.S. savings bonds issued after 1989 or series I bonds. The bond must be issued either in your name as the sole owner or in the name of both you and your spouse as co-owners. In addition, the owner of the bond must be at least 24 year old before the bond's issue date.
You must fulfill certain other requirements as follows in order to exclude the interest earned on qualified U.S. savings bonds:
- You must pay qualified education expenses for yourself, your spouse, or a dependent;
- Your modified gross income is less than an amount set by the Internal Revenue Code;
- Your filing status is not married filing separately.
Qualified education expenses include:
- Required tuition and fees. Expenses for room and board along with fees for courses involving sports, games, or hobbies that are not part of a degree or certificate program are not qualified education expenses;
- Contributions to a qualified tuition program;
- Contributions to a Coverdell education savings program.
Certain tax-free benefits reduce your qualified education expenses, including the tax-free portions of scholarships, fellowships, distributions from a Coverdell education savings account or a qualified tuition program, or any nontaxable tax-free payment (other than a gift or inheritance) received as education assistance. In addition, you must adjust your qualified education expenses by any expenses used in calculating the Hope and lifetime learning credits.
If the total proceeds that you receive when you cash in the qualified bonds are not more than your adjusted qualified education expenses for the year, all of the bond interest may be tax-free. However, if the total received is more than the adjusted expenses, only a fraction of the interest earned may be excluded from income. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |