Education Savings Bonds and Taxes

Education Savings Bonds and Taxes

Qualified U.S. Savings Bonds generate interest, which isn’t required to be included in your income at tax time, if you used the bond to pay for certain higher education expenses. Additionally, that interest isn’t subjected to any state or local income tax.

Note: You can’t use the same expenses to claim the interest exclusion for a savings bond AND any other educational tax benefit. This includes tax-free distributions from savings plans, scholarships, military student aid, tuition waivers, employer assistant, the American Opportunity Tax Credit, The Lifetime Learning Credit, or a deduction for tuition and fees.

The interest exclusion only applies to Series EE U.S. Savings Bonds that were issued on 1/1/1990 or later and all Series I U.S. Bonds. Any bonds issued before 1990, as well as Series H and Series HH Savings Bonds aren’t eligible for the interest exclusion.

The bond must be owned directly by the taxpayer or co-owned with the taxpayer and their spouse. If you use your dependent’s bond to pay for educational expenses, you can’t claim it for the interest exclusion. The dependent can be designated as a beneficiary on your bonds, though.

The purchaser has to be 24 years of age or older when the bond is issued. The issue date is the first of the month in which the bond was purchased.

All proceeds from redeeming the bond needs to be spent on qualified higher education expenses or rolled into a , prepaid tuition plan or Coverdell education savings account if you want to claim the interest exclusion. If the redemption amount exceeds the expenses for the year and the remainder isn’t put into a qualified savings account, the interest on the excess isn’t eligible for exclusion from income.

The bond must be redeemed in the same year the expenses were incurred.

There is an income phaseout for the interest exclusion for both single filers and married taxpayers filing jointly. Married taxpayers are only eligible for the exclusion if they file a joint return. For 2017, the income phaseout is as follows:

  • Single, Head of Household, Qualifying widow(er): Modified Adjusted Gross Income of $93,150 or more
  • Married Filing Jointly: Modified Adjusted Gross Income of $147,250 or more

You can’t take the exclusion if your income exceeds these amounts.

You may be able to bypass the income phaseout if you know you’ll have a higher income once the student is enrolled in college, but currently fall below the income amount. To do this you’ll have to redeem your bond now and roll the proceeds into one of the aforementioned education savings accounts. The income phase outs do not apply to tax-free distributions from , prepaid tuition plans, or Coverdell education savings accounts.