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Education savings bonds
The federal government's Education Savings Bond Program allows you to take a deduction for some or all of the interest you earn on savings bonds provided you use the proceeds to pay for college expenses.
Savings bonds must be either Series EE/E or Series I bonds issued since 1990. In order to take the deduction, the bonds' principal and interest must be used to pay for qualified educational expenses in the year you cash in the bonds. The expenses can be for you, your spouse, or a dependent.
You can take an interest deduction for an amount that is equal to the amount of qualified educational expenses in the same year. For example, if your expenses are $4,000 and you have $5,000 in maturing bond principal and interest, you can deduct 80% of the interest earned.
You may wish to keep in mind the following requirements of the Education Savings Bond Program:
- Age, ownership, and tax filing requirements. You must be at least age 24 when you begin to buy eligible savings bonds. The bonds must be registered in yours or your spouse's name. A dependent can be designated as beneficiary. If married, you must file a joint tax return.
- Coordination with other sources of financial assistance. You must reduce your eligible educational expenses by the amount of scholarships, employer-paid assistance, or other financial aid you receive.
- Yearly purchase limits of bonds. You can buy up to $30,000 a year in face value of either Series EE/E or Series I bonds. (An exception is if Series EE/E bonds are co-registered in you and your spouse's name. In that case, you can buy up to $60,000.)
- Income limits. The tax-deductible benefit of the bond savings program has income limits that determine whether you can take a full or partial deduction. The following table shows the levels of modified adjusted gross income (MAGI) that you can earn in 2007 before your tax deduction is phased out.
You lose the entire tax altogether at higher incomes. For single persons, the tax deduction is completely phased out when income is more than $80,600 in 2007. For married persons filing a joint return, the tax deduction disappears when income is more than $128,400 in 2007.
Tax Filing
Status |
Partial Phase-out |
Full Phase-out |
Single
|
$65,600 |
$80,600 |
Married filing
jointly
|
$98,400 |
$128,400 |
|
Even if you are ineligible to participate in the Education Bond Savings Program, you can still buy savings bonds to pay for your child's college. The tax treatment is a little different, however. For 2007, the first $1,700 in interest is taxed at your child's rate, if the child is under age 18. This amount is indexed yearly for inflation. Interest earned in excess of that amount is taxed at the parents' highest marginal tax rate. When your child turns age 18, however, all the interest on these bonds is taxed at his or her rate.
For more information on buying U.S. savings bonds online, see the U.S. Treasury's TreasuryDirect.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Next, we'll take a look at using Coverdell education savings accounts, formerly called education IRAs, to save for future college expenses.
Next Topic: Education savings accounts
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