The fine print of the US Savings Bond college education deduction
Monday, June 14th, 2004
Categorized as: Savings Bond taxes • Savings Bond college education deduction
The federal government now offers a large number of programs to help you get a college education deduction for yourself or a dependent. And the simple truth is that the ability to deduct US Savings Bond interest from your income when it is spent on education is one of the least attractive options.
The problem with the Savings Bond education interest deduction is that it comes with a large amount of fine print. It's actually impossible to know whether you'll even qualify for the deduction when you start investing.
In my book I recommend a completely different way to use Savings Bonds to save for college. Unlike other college savings plans, it minimizes taxes without any limitations and it works whether your child ends up going to college or not.
However, if you already own US Savings Bonds and if you or anyone who's named on your tax return has college education expenses, you may be able to cash in a bond and deduct at least some of the interest you've earned from your income, if you can meet all of the following limitations:
- You are the registered owner of the bond
- If there is a co-owner, it must be your spouse
- Your bond is Series I or Series EE and was issued in January 1990 or later
- You were at least 24 years old on the issue date of the bond (the first day of the issue month)
- The college education expenses are for you, your spouse, or a dependent for whom you are claiming an exemption on this same tax return
- The education expenses are for:
- tuition and fees (not room, board, or non-degree courses)
- contributions to a qualified tuition program
- contributions to a Coverdell education savings account (ESA - also known as an education IRA)
- You haven't already used the above expenses for other income-tax related deductions on this return
- Your income tax filing status is something other than married filing separately
- Your modified adjusted gross income is within the income limitations for the Savings Bond education deduction.
- Finally, the deduction phases out if the amount of money you receive from cashing the bonds (not just the interest, mind you, but the total amount) is more than the eligible education expenses.
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I have some EE bonds purchased during the last two years. My daughter is presently already in college. Can I redeem my bonds for the "face value" now or do I have to wait.
Hi D. Gamel - that would be sweet if we could double our money in two years by buying EE bonds, but unfortunately it doesn't work that way. Your bonds will take 20 years to reach face value. You can cash them now and get the education deduction on the bit of interest they've earned, but after just two years it won't be much.
Tom Adams
Are there ANY circumstances where EE Bonds that I own can be used to pay my Grandson's College Education without my having to pay the taxes on the transaction? I'm still confused about whether I can transfer ownership or make his parents co-owners or how to pay the tuition and other expenses without having to pay 1/3rd of the Bond's current worth in Federal/State Income taxes.
Can you help me?
Thank you.
Murray Moskowitz
Hi Murray - There is NO circumstance under which EE bonds can get a deduction for college education expenses for someone who isn't a dependent on your tax return.
Making the parents the owners of the bond so they can get the deduction is a taxable event for you.
Making the parents co-owners with you doesn't work because for this deduction, the person going to college has to be the dependent of both co-owners.
Assuming your grandchild has a low rate tax rate, you could make the grandchild a co-owner and then have the grandchild cash the bond. The 1099-INT will be issued in the grandchild's name. However, the IRS still says you owe the tax; see Who pays the taxes?.
It boils down to this - the IRS doesn't want a non-custodial grandparent to be able to get this deduction and it's had a lot of time to think about all the possible loopholes and block them.
Tom Adams
My son will be attending college and we would like to cash in some of the bonds we have been purchasing for him to help with his costs. We have several questions: 1.The first bonds were purchased in his name with my husband listed as POD. We were then advised to purchase the bonds in my husbands name with our son as POD. How does this affect cashing them in? 2.Am I correct in understanding that the purchaser is responsible for the taxing of cashed in bonds regardless of who is named as owner? 3.Does the use of money from the bonds for secondary education eliminate paying taxes on that money?4.I assume the money from the cashed in bonds must be used for specific secondary educational costs, such as tuition and not for living expenses, how is that documented? There is so much we don't understand! We've been buying them always with the intent of learning fully about them later - it's later!
Thanks for your help. I love this website.
Karen Graff
Hi Karen -
1.) The person who is the owner has to cash the bond. The tax deduction isn't available on the bonds that name your son as owner, but his tax rate is probably near zero anyhow.
2.) That is not correct. If the person who put up the money for the bond isn't a named owner or co-owner on the bond, then that person has no responsibility for the taxes.
3.) "Secondary education" means high school and the deduction isn't available for that. Since you're talking about your son going to college, however, the tax deduction is available to you within the limits described in the main article above.
4.) The college will send you or your son and the IRS a tax form stating your son's tuition costs.
Let me know if you have any other questions.
Tom Adams
Hi Tom,
When cashing in EE Bonds for Education do you count from December of 2006 to December 2007, or is it for the year of 2007.
Hi W - you offset the interest earned from Savings Bond redemptions during the 2007 calendar year (as shown on the 1099-INT you will receive) with the tuition paid in 2007 (as shown on a tax form the college sends you).
Tom Adams
Hi Tom,
This year I cashed in Series EE Bonds to pay for my daughter's college semester. After cashing them in, she decided to wait and not go to school until next Fall! Is there a way that I can minimize the tax liability from cashing them in this year?
Thanks.
Bonnie McGuire
Hi,
Hope you can help me out, I've never been at this site. I have 3 grandchildren and want to purchase savings bonds for them. They will be for school or for them to use in retirement. I want control of the bonds so how do I set up the names. The children are 1, 7 and 12.
thanks,
Debby
Bonnie - The only other possibility to avoid taxes is to give the money to charity and take a charitable tax deduction to offset the income.
Debby - If you want control of the bonds, you need to put your name on them. However, the IRS says this means you will owe the tax on the bonds when they are cashed. You can put a child's name on each bond as a co-owner or as a beneficiary.
If you don't want to pay the tax and if the parents would qualify for the education deduction discussed on this page, then you should put the bonds in a parent's name. Otherwise, you should use the child's name. In both these cases, however, you lose all control over the bonds.
Tom Adams
Hi,
I have savings bonds that are in my husbands name as the owner and my son as the pod. My daughter is in college right now and I would like to use these savings bond to pay her tuition. Would I still be able to deduct interest on these bonds (issued after 1/1990) even if the pod is her brothers?. Both kids are dependents on our tax returns.
Cynthia
Hi Cynthia - yes, assuming you otherwise qualify, you can use the bonds for your daughter's tuition - the rules for this deduction don't pay any attention to who the POD is.
Tom Adams
I want to purchase I Bonds for my grandaughters education (she's 1 yr old) and list her as the beneficary. The bonds will be in my son's name but I will retain them so that they cannot be cashed in prior to attending college (if she decides to attend college). I have looked at 629 pre-paid college plans and believe that I Bonds are more of a conservative and safe saving tool.
Ron - Your plan makes good sense to me.
Tom Adams
We purchased EE bonds about 12 years ago because I was told we would not be taxed if they were used for college tuition/fees. We have 3 in college and I cashed some in in 2007 and 2008. I pulled up the Income Limits section here and am a little confused. If our adjusted gross income is less than $98,400 in 2007, can we still take the deduction? It states that it begins to phase out at the low end - how can I tell how much is deductible and is there some document I can use for back-up? Thanks a lot.
Martha Starr
Martha - when you do your taxes, you have to fill out IRS Form 8815 to take the deduction. That form takes you through the phase out calculation for income, as well as another one that compares how much you got from cashing the bonds with how much you spent on tuition.
Tom Adams
My daughter is not going to use the savings bonds for education. She is still in high school. The bonds are both E series and the older ones. The bonds are listed in both our names. I want her to cash in the bonds in her name and avoid taxes under her low income status. Is that possible?
Julie - if your daughter cashes the bonds herself, the 1099-INT tax form reporting the interest to the IRS will be issued with her Social Security Number.