Q. Are there advantages to using savings bonds to save for college?
A. Under some circumstances, the interest on savings bonds purchased after December 31, 1989, may be completely or partially excluded for tax purposes if the bonds are cashed during a year when tuition and fees at a qualified post-secondary educational institution are paid for the bond owner, the owner’s spouse, or a dependent. For full details on this offering, you should review a copy of IRS Publication 550, Investment Income and Expenses, and IRS Form 8815, Exclusion of Interest from Series EE U.S. Savings Bonds issued after 1989.
In order to be eligible for the income tax exclusion, bonds must be registered in the name of a person who is 24 years of age or older on the first day of the month in which the bonds are issued. Any other individual can be listed on the bonds as a beneficiary, but only a spouse can be a co-owner if the bonds are to qualify for the exclusion. The bonds must be redeemed in the same calendar year that tuition and fees are paid. The tax exclusion can be claimed for the interest on bonds whose redemption value equals or exceeds the total cost of tuition and fees. If the value of the bonds redeemed exceeds the amount spent, only a proportional amount of the interest income may be excluded from Federal income tax.
In the year of redemption, a bond owner’s modified adjusted gross income must meet certain income limits. You should verify the current income limits in the IRS Publications for the current tax year. Married couples must file jointly. Modified adjusted gross income includes the accumulated interest on bonds redeemed during the year before the exclusion.