All or part of the interest earned on Series EE bonds issued after December 31, 1989, or the interest earned on Series I bonds is excluded from income for qualifying individuals if when the savings bonds are sold, the accrued interest is used to pay for certain educational expenses.
This column discusses which individuals who cashed in Series EE or Series I savings bonds during 2020 are eligible to exclude the interest income on their 2020 Federal income tax returns.
To qualify for the exclusion, the savings bond owner must be at least 24 years old at the time of the bond’s issue date. The savings bond owner, the savings bond owner’s spouse, or the savings bond owner’s tax dependent must attend a post-secondary education institution and incur tuition and other educational expenses. Qualifying post-secondary institutions include college, university or vocational education school. Room, board and books do not qualify as education expenses. Qualified education expenses include contributions to a qualified tuition program (QTP) or an educational savings account (ESA).
The exclusion is phased out-based on the savings bond owner’s modified adjusted gross income (MAGI) as follows.
Modified Series EE Exclusion AGI Phased-out Ranges
The MAGI phase-out applies in the year the savings bonds are redeemed and interest is excluded from income.
For the purpose of utilizing this tax break, a common mistake many parents make is buying savings bonds in their child’s name. The parent is advised buy the bond in the parent’s name because a bond owner must be at least 24 years old before the bond’s issue date in order to redeem the bonds potentially tax-free in order to pay for qualifying education expenses. The issue date is printed on the form of the savings bond. The issue date is not necessarily the date of purchase – it will be the first day of the month in which the bond is purchased.
The exclusion of interest is done on IRS Form 8815 (Exclusion of Interest from Series EE and I U.S. Savings Bonds Issued After 1989) for the year in which the bond(s) are cashed. If the amount of the redemption proceeds from all eligible savings bonds redeemed during the year exceeds the amount of qualified educational expenses paid during the year in which the bonds were cashed, then the amount of excludable interest will be reduced pro rata.
For example, if the bond proceeds total $20,000 ($10,000 principal plus $10,000 interest) and the qualified education expenses are $12,000, the bond owner would be able to get an exclusion for 60 percent ($12,000/$20,000) of the interest earned or 0.60 times $10,000 which equals $6,000, assuming MAGI limitations are met.
If a child’s name is on the savings bonds, then a parent can change the name on the savings bond into the name of the parent, provided the money used to buy the bonds did not belong to the child Also, the savings bonds must be dated after December 1989.
If Series I savings bonds or Series EE savings bonds purchased after December 1989 were bought to qualify for the Education Bond Program but were improperly registered when they were issued, the savings may be reissued to qualify for the program.
In order to reissue the savings bond to change the name on the savings bond, Bureau of the Fiscal Service Form FS Form 4000 (Request to Reissue United States Savings Bond), (may be downloaded here) has to be completed and submitted.
The purchaser of the bonds would have to complete and sign the form. The signature on the form needs to be guaranteed or certified by an authorized certifying officer available at a bank, trust company or credit union. The completed form above with the savings bonds should be mailed to the Treasury Retail Securities site located at:
Treasury Retail Securities Services
P.O. Box 214
Minneapolis, MN 55480-0214
Any savings bonds-related inquiries may be emailed to: SavBonds@bpd.treas.gov, telephone: 844-284-2676 (toll-free) and fax: 612-629-4285.
Financial Aid Forms
Series EE and Series I savings bonds are considered assets to be included on the financial aid form as owned by the parents for any member of the household.
The following chart summarizes the education-related tax incentives of U.S. Savings Bonds:
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019