Savings Bond Education Exclusion
Overview
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Issue: Series EE or I Bonds issued after 1989
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Purchaser: Must be purchased by an individual over the age of 24
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Exclusion = (Qualified Expensed Paid/Total Redemption Proceeds) x Interest
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20222023 AGI Phase-out
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Joint:$128,650 to $158,650$137,800 to $167,800
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Unmarried: $85,800 to $100,800$91,850 to $106,850
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No Double Benefit
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Used for Expenses of Education for taxpayer, spouse or dependent at the time the bonds are cashed.
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Applies to Post-Secondary Education Only
Related IRS IRC, Publications and Forms
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Pub 970 – Tax Benefits for Education
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Form 8815 - Exclusion of Interest from Series EE and I U.S. Savings Bonds Issued After 1989
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Form 8818 – Optional Form to Record Redemption of Series EE and I U.S. Savings Bonds Issued after 1989 (for Individual with Qualified Higher Education Expenses)
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IRC Sec 135
An individual who pays qualified higher education expenses with redemption proceeds from Series EE or I bonds issued after ’89 can potentially exclude from income the bond interest. No exclusion is available to a taxpayer using the married filing Married Separate separate filing status. Form 8815 is used to compute the exclusion. Form 8818 may be used to keep a record of such bonds.
If the taxpayer’s total redemption proceeds (principal plus interest) for a tax year exceeds the qualified expenses paid in that year for the taxpayer, spouse or dependent, the amount of interest that is excludable is limited to a fraction of the otherwise excludable portion:
Qualified Expenses Paid
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Total redemption proceeds
Example: Greg redeemed $10,000 ($5,000 interest, $5,000 principal) and paid qualifying college expenses of $6,000. The fraction of expenses to redemption amounts is 60%. This means that $3,000 of the interest ($5,000 x .60) is excludable from income. Of course, the principal amount, $5,000, is also excludable.
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Alert
You may want to advise clients who are depending on the proceeds from savings bonds to pay education expenses to plan well ahead for cashing in their paper-issued bonds as it may take longer than they expect to cash in the bonds. Until Jan. 1, 2012, U.S. savings bonds were issued on paper. While it used to be common for banks to offer the service of cashing in paper U.S. savings bonds, fewer are doing so now. So, clients planning to take their paper bonds to a local bank should check with the financial institution beforehand to see whether it redeems savings bonds. If it does, there could be a dollar limit per transaction (necessitating several trips to the bank), and the bank will likely require identification, so the client should find out what documents are needed in advance of going to the bank. Some institutions require having an active account open for at least six months, plus proper identification. An alternative for those unable to find a local institution to cash the bonds is to mail them to the U.S. Treasury for redemption. See the treasurydirect.gov web site for further information and mailing instructions.
California Differences
California conforms to Federal treatment.