To get the tax exemption, you must spend bond money on education in the same year you redeemed your bonds.
Normally, interest earned on U.S. Savings Bonds is subject to federal income tax, but under certain circumstances interest earned as of 2010 on EE or I Bonds used to pay education expenses is not taxed. Among other things, the exemption applies only for tuition at a college, university or vocational school that meets standards for federal financial aid programs like guaranteed student loans, and the student must be over age 24 and the bonds must have been purchased after 1989.
Qualified Expenses
You can use your bond proceeds to pay tuition and related fees and any required course expenses other than textbooks. You can't use bond money to pay expenses for sports or games unless participation in such activities is required by your degree or certificate program. You can't use bond proceeds to pay for books or room and board, and your qualified expenses must be reduced by amounts you may receive from scholarships, fellowships and other forms of educational financial assistance.
Amount
You must use both the principal and the interest from your redeemed bonds for qualified educational expenses, according to TreasuryDirect. If the value of your redeemed bonds exceeds your education expenses, you must pay federal income tax on the excess interest. The amount of interest subject to tax will be prorated according to the percentage of bond proceeds used for education expenses.
Owner Requirements
The bonds you redeem for your own education expenses must be registered in your own name. When redeeming bonds for your child's education, they must be registered in your name or your spouse's name. Your child can't be a co-owner of the bonds but can be listed as a beneficiary. Married couples must file a joint return to qualify for the education exemption regardless of whether the bonds are used for their own education or that of their children.
Income Requirements
There's an income ceiling for taking the full savings bond education tax exclusion.For 2010, the exclusion for a single filer begins to phase out when adjusted gross income exceeds $70,100 and is eliminated entirely when income exceeds $85,100. For married couples filing jointly, the exclusion starts phasing out when income tops $105,100 and disappears entirely when income exceeds $135,100.
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