Tax Free Savings Bonds for Education
An exclusion in the U.S. tax code allows the use of savings bond proceeds to be used to pay for education, and the interest earned on the bonds will be tax free. The interest on savings bonds grows tax deferred until the bonds are redeemed, and the education exclusion can be used to eliminate the tax that would be due on the deferred interest.
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Education Savings Bonds
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There is not a specific type of savings bond used for tax-free education savings. The regular series EE and I bonds that can be purchased at banks or directly from the Treasury Direct website can be used to qualify for the education income tax exemption if they are purchased and redeemed correctly. Series EE bonds are available in amounts from $25 to $5,000 and pay a fixed rate of interest. Series I bonds cost from $50 to $5,000 and pay a rate based on the rate of inflation.
Purchase Restrictions
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To qualify for the education tax exemption, the savings bonds must have been purchased after December 1989 and the registered owner must be at least 24 years old at the time of issue. To purchase savings bonds for children's education, the bonds must be registered to the parents to qualify for the exemption. The savings bonds cannot have the children listed as co-owners.
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Education Expenses
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The saving bond interest is tax free if the proceeds of the bond redemptions are used to pay for the post-secondary education expenses of tuition and fees. The education expenses can be incurred by the bond owner, spouse or dependent. Qualified education institutions include colleges, universities and vocational schools. The payment of books or room and board do not qualify for the income tax exemption.
Claiming the Tax Exemption
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The education expenses must be paid in the same year the bonds are redeemed. The income tax exemption is claimed on IRS Form 8815. If the registered owner of the bond is married, taxes must be filed as a joint income tax return. There is no limit on the amount of bonds that can be cashed to pay education expenses, as long as the expenses all meet the qualification requirements. The income tax exemption is phased out for higher income tax filers. In 2010, the maximum income was $135,100 on a joint return and $85,100 if filing single or head of household.
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