Dunnan on Dollars

  Personal Finance Tips from Nancy Dunnan

Using U.S. Savings Bonds To Pay For College

This week, we address how parents and, under certain circumstances grandparents, can use EE Savings and I Bonds to pay for their child or grandchild's college and at the same time, get a significant tax break.

Here are the details of the Education Bond Program:

o Interest earned on Education Bonds is free from federal, state and local taxes when the bonds are redeemed to pay qualified higher education expenses or, to roll over into a 529 College Plan.

(But keep in mind that in all cases, whether or not you use U.S. Savings Bonds to pay for college, their income is exempt from state and local taxes. Education Bonds add on the exclusion from federal taxes.)

o Qualified expenses include tuition and required fees at colleges, universities and vocational schools. Room and board and books are not included.

Note: Qualified expenses are reduced by the amount of any financial aid received in the same tax year.

o Eligible bonds include Series EE Bonds issued after December 31, 1989 and all I Bonds. Series HH Bonds are not eligible.

o The bond owner must be at least 24 years old. Parents can purchase bonds for their children, but the bonds must be registered in the parent's name. The child cannot be listed as a co-owner but may be listed as a beneficiary.

o Grandparents who own education bonds can claim an interest exclusion for their children or grandchildren only if the child or grandchild is a dependent and listed as an exemption on the grandparents' income tax return.

o There is an annual purchase limit of $30,000 worth of bonds per owner. A husband and wife purchasing bonds as co-owners may purchase up to $60,000 in bonds in one year.

o Parents who are married must file a joint income tax return to qualify for the tax break. Married couples filing separate returns are not entitled to the tax break.

o There are income limits on the interest exclusion. It is based on the year in which you redeem the bonds...not the year in which your purchase the bonds.

For 2010, the income phase outs are $70,100 to $85,100 for single filers and $105,100 to $135,100 for married taxpayers filing jointly. The income limits are adjusted annually for inflation and rounded out to the nearest $50.

Note: Income is defined as modified adjusted gross income.

TIP: If you accidentally purchased the bonds in your child's name, to get the tax break have them reissued in your name. You can do this as long as the funds used to buy the bonds didn't belong to your children and they were purchased after December 31, 1989.

Tax Forms
The amount of interest you can exclude from taxes is computed on Form 8815, "Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989."

For Further Information:
Call 800-US-BONDS or go to: www.savingsbonds.gov.

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