Savings Bond Tax Exclusion for Education

The savings bond tax exclusion for education allows individuals to avoid paying taxes on the interest that they earn on savings bonds as long as they use the money for college education expenses. Many people use this strategy as a way to pay for children's college educations. Here are the basics of the savings bond education tax exclusion.

How It Works

When you purchase a Series EE or I savings bond, you will earn a certain amount of interest each year. The government does not make you pay taxes on the interest as it is accrued. Instead, you pay taxes on the money once you cash the savings bonds in. Normally, the total amount of interest that you earned would be added to your taxable income, and your tax liability would be calculated based on your marginal tax rate. However, when you use that money to pay for education expenses, you can avoid including this amount of interest in your income. This can be a significant tax break, and it can help you generate extra money for college without having to worry about losing any of it to taxes. 

Same-Year Rule

In order to qualify for this tax exclusion, you have to use the money in the same year that you cash in the savings bonds. This means that you need to hang onto the bonds until your child is planning on going to college. You cannot cash in the bonds and then keep the money for a few years before using it to pay for college. All of this has to take place in the same calendar year.

Registration

The bonds have to be registered correctly in order to be used for this program. If you are using the bonds to pay for a child's education, you have to have the bonds registered in your own name or the name of your spouse. The child can be listed as a beneficiary on the bond, but she cannot be the owner of the bond. You could also potentially use savings bonds to pay for your own education. If this is the case, you have to have the savings bonds registered in your name. 

Other Requirements

In order to qualify for this program, you also must meet some other specific requirements. For example, you have to be at least 24 years old on the first day of the month in which you purchase the savings bonds. If you are younger than 24, the bonds cannot be used for this tax exclusion. 

If you are married, you will have to file a joint tax return with your spouse in the year that you cash in the savings bonds. You also have to meet specific income requirements in order to potentially qualify for this tax exclusion. The college or university that you use the money for has to meet the standards for federal assistance, such as having a guaranteed student loan program.

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