The interest on qualified U.S. Savings Bonds is excluded from income when the savings bonds are redeemed to pay for qualified higher education expenses. The interest on U.S. Savings Bonds is not subject to state or local income tax.
Taxpayers cannot double dip. Taxpayers cannot use the same expenses to justify both the exclusion from income for U.S. Savings Bonds and another education tax benefit, such as a tax-free distribution from a college savings plan, scholarships, military student aid, tax-free tuition waivers, employer educational assistance, the American Opportunity Tax Credit, the lifetime learning tax credit or the tuition & fees deduction.
Interest on Series EE U.S. Savings Bonds issued on or after 1/1/1990 and all Series I U.S. Savings Bonds are eligible for the exclusion from income. Series H and HH U.S. Savings Bonds and bonds issued before 1990 are not eligible.
Series EE U.S. Savings Bonds earn a fixed rate of interest. The interest rate on new Series EE U.S. Savings Bonds is set on May 1 and November 1. Series EE U.S. Savings Bonds purchased from May 1997 to April 2005 had a variable interest rate based on 90% of the six-month average of 5-year Treasury yields. Series I U.S. Savings Bonds combine a fixed interest rate with an inflationary adjustment that changes twice a year based on CPI-U. Series EE and Series I U.S. Savings Bonds earn interest for up to 30 years.
Eligible Bond Owners
The U.S. Savings Bonds must be owned by the taxpayer or co-owned by the taxpayer and the taxpayer’s spouse. U.S. Savings Bonds that are owned or co-owned by the taxpayer’s dependent are not eligible for the interest exclusion. (The dependent may be designated as a beneficiary on the bonds, however.)
If the U.S. Savings Bonds were registered in the name of the taxpayer’s dependent, but the funds used to purchase the bonds were provided by the taxpayer, the bonds may be reissued with the taxpayer listed as the owner to qualify for the interest exclusion. File form PD F 4000 E to have paper U.S. Savings Bonds reissued. For bonds purchased through TreasuryDirect, bond owners can correct the registration directly, unless the bonds are held in a minor linked account, in which case the bond owner will have to file form PD F 5446 from within the account. Otherwise, bonds owned by a child will be taxed at the child’s rate, which may offer some tax savings.
The purchaser must have been age 24 or older when the bond was issued. The issue date is the first day of the month in which the bond is purchased.
How to Redeem a U.S. Savings Bond
To be eligible for the exclusion from income, the proceeds from the redemption of U.S. Savings Bonds must be spent either on qualified higher education expenses or rolled over into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account. If the amount redeemed exceeds the qualified higher education expenses for the year and is not contributed to a 529 college savings plan, prepaid tuition plan or Coverdell education savings account, the interest on the excess is not eligible for the exclusion from income.
Qualified higher education expenses are limited to tuition and fees for the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents. Room, board, books and supplies are not eligible. Courses involving sports, games and hobbies are also not eligible unless they are part of a degree or certificate program. The tuition and fees must be for courses at a college or university that is eligible for Title IV federal student aid.
The U.S. Savings Bonds must be redeemed during the same year in which the qualified higher education expenses are incurred.
The exclusion from income for interest on U.S. Savings Bonds used for education phases out for taxpayers who file federal income tax returns as single filers or as married filing jointly. Married taxpayers who file separate returns are ineligible. The income phaseouts are adjusted annually according to inflation (CPI-U) since 1989, rounded to the nearest multiple of $50, as is illustrated by this table.
The income phaseouts shown for 1993, 1994 and 1995 are the income phaseouts after they were retroactively increased in 1996.
Bypassing the income phaseouts: If the taxpayer is likely to have income exceeding the income phaseouts when the student is enrolled in college, but currently has income below the income phaseouts, it may be advisable to redeem the U.S. Savings Bonds now to roll the proceeds into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account. There are no income phaseouts on tax-free distributions from 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts.
The legislation authorizing the exclusion from income for interest on U.S. Savings Bonds does not expire.
- Education Savings Bond Program, Chapter 10, IRS Publication 970
- Education Planning: Savings Bond Education Tax Exclusion, TreasuryDirect
- Using Savings Bonds for Education, TreasuryDirect
- IRS Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
- IRS Form 8818, Optional Form to Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989
- Internal Revenue Code: 26 USC 135
- Regulations: 31 CFR 351.81 (Series EE Savings Bonds), 31 CFR 359.66 (Series I Savings Bonds)
- Technical and Miscellaneous Revenue Act of 1988, (P.L. 100-647, 11/10/1988), adds income exclusion for the education savings bond program, effective starting with the 1990 tax year
- Omnibus Budget Reconciliation Act of 1989, (P.L. 101-239, 12/19/1989), minor change
- Omnibus Budget Reconciliation Act of 1990, (P.L. 101-508, 11/5/1990), minor changes
- Small Business Job Protection Act of 1996, (P.L. 104-188, 8/20/1996), adds coordination restriction with 529 college savings plans and prepaid tuition plans
- Taxpayer Relief Act of 1997, (P.L. 105-34, 8/5/1997), adds coordination restriction with American Opportunity Tax Credit (then Hope Scholarship Tax Credit) and Lifetime Learning Tax Credit, adds contributions to 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts as options for qualified higher education expenses
- Internal Revenue Service Restructuring and Reform Act of 1998, (P.L. 105-206, 7/22/1998), changes definition of eligible educational institution, modifies wording of coordination restrictions
- Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999, (P.L. 105-277, 10/21/1998), minor change
- Economic Growth and Tax Relief Reconciliation Act of 2001, (P.L. 107-16, 6/7/2001), allows taxpayer to elect to not use the higher education tax credits (previous law reduced qualified higher education expenses by the amount allowable, as opposed to allowed, under the higher education tax credits; clarifies coordination restriction with 529 college savings and prepaid tuition plans
- A bill to amend the Internal Revenue Code of 1986 to rename the education individual retirement accounts as the Coverdell education savings account, (P.L. 107-22, 7/26/2001), minor change that renames education IRAs as Coverdell ESAs
- American Jobs Creation Act of 2004, (P.L. 108-357, 10/22/2004), technical amendment
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