The fine print of the US Savings Bond college education deduction
Monday, June 14th, 2004
Categorized as: Savings Bond college education deduction • Savings Bond taxes
The federal government now offers a large number of programs to help you get a college education deduction for yourself or a dependent. And the simple truth is that the ability to deduct US Savings Bond interest from your income when it is spent on education is one of the least attractive options.
The problem with the Savings Bond education interest deduction is that it comes with a large amount of fine print. It’s actually impossible to know whether you’ll even qualify for the deduction when you start investing.
In my book I recommend a completely different way to use Savings Bonds to save for college. Unlike other college savings plans, it minimizes taxes without any limitations and it works whether your child ends up going to college or not.
However, if you already own US Savings Bonds and if you or anyone who’s named on your tax return has college education expenses, you may be able to cash in a bond and deduct at least some of the interest you’ve earned from your income, if you can meet all of the following limitations:
- You are the registered owner of the bond
- If there is a co-owner, it must be your spouse
- Your bond is Series I or Series EE and was issued in January 1990 or later
- You were at least 24 years old on the issue date of the bond (the first day of the issue month)
- The college education expenses are for you, your spouse, or a dependent for whom you are claiming an exemption on this same tax return
- The education expenses are for:
- tuition and fees (not room, board, or non-degree courses)
- contributions to a qualified tuition program
- contributions to a Coverdell education savings account (ESA – also known as an education IRA)
- You haven’t already used the above expenses for other income-tax related deductions on this return
- Your income tax filing status is something other than married filing separately
- Your modified adjusted gross income – including the interest income from these Savings Bonds – is within the income limitations for the Savings Bond education deduction.
- Finally, the deduction phases out if the amount of money you receive from cashing the bonds (not just the interest, mind you, but the total amount) is more than the eligible education expenses.