Introduction.
In 1990, the Treasury Department announced the
"Education Bond Program." This program
allows interest to be completely or partially
excluded from Federal income tax when the bond
owner pays qualified higher education expenses
at an eligible institution or State tuition
plan in the same calendar year the bonds are
redeemed. Payments to State tuition plans have
been eligible since January 1, 1998.
Eligible
Bonds.
Series EE bonds issued January 1990 and later,
along with all Series I Bonds, are eligible for
this program. You aren't required to indicate
that you intend to use the bonds for educational
purposes when you buy them, but make sure you
meet the program's requirements, some of which
apply when you buy the bond(s).
Requirements.
To qualify, you must be at least 24 years old
on the first day of the month in which you bought
the bond(s).
When
using bonds for your child's education, the bonds
must be registered in your name and/or your spouse's
name. Your child can be listed as a beneficiary
on the bond, but not as a co-owner.
When
using bonds for your own education, the bonds
must be registered in your name.
If
you're married, you must file a joint return to
qualify for the exclusion.
Eligible
Institutions. Post-secondary institutions, including
colleges, universities, and vocational schools,
that meet the standards for federal assistance
(such as guaranteed student loan programs) qualify
for the program.
Qualified
Expenses.
Qualified educational expenses include tuition
and fees (such as lab fees and other required
course expenses). The expenses may be for the
benefit of you, your spouse, or a dependent for
whom you claim an exemption. Expenses paid for
any course or other education involving sports,
games, or hobbies qualify only if required as
part of a degree or certificate-granting program.
The costs of books and room and board aren't qualified
expenses. (Qualified State tuition plans are also
included among eligible expenses.) The amount
of qualified expenses is reduced by the amount
of any scholarships, fellowships, employer-provided
educational assistance, and other forms of tuition
reduction. Expenses must be incurred during the
same tax year in which the bonds are redeemed.
You must use both the principal and interest from
the bonds to pay qualified expenses in order to
exclude the interest from your gross income. If
the amount of eligible bonds you've cashed during
the year exceeds the amount of qualified educational
expenses paid during the year, the amount of excludable
interest is reduced pro rata.
Example:
Assuming bond proceeds equal $10,000 ($8,000 principal
and $2,000 interest) and the qualified educational
expenses are $8,000, you could exclude 80 percent
of the interest earned, which would equal $1,600
(.8 x 2000).
Income limitations.
The full interest exclusion is only available
to married couples filing joint returns, or to
single filers, with modified adjusted gross income
(which includes the interest earned) under a certain
limit. These income limits apply in the year you
use bonds for educational purposes--not the year
you buy the bonds. Exclusion benefits are phased
out for joint or single filers with modified adjusted
gross income that exceeds the limit. 2002 income
limitations follow.
Tax Year 2002 Income Limits:
For single taxpayers, the tax exclusion begins
to be reduced with a $57,600 modified adjusted
gross income and is eliminated for adjusted gross
incomes of $72,600 and above. For married taxpayers
filing jointly, the tax exclusion begins to be
reduced with a $86,400 modified adjusted gross
income and is eliminated for adjusted gross incomes
of $116,400 and above. Married couples must file
jointly to be eligible for the exclusion.
Tax
Year 2003 Income Limits:
For single taxpayers, the tax exclusion begins
to be reduced with a $58,500 modified adjusted
gross income and is eliminated for adjusted gross
incomes of $73,500 and above. For married taxpayers
filing jointly, the tax exclusion begins to be
reduced with a $87,750 modified adjusted gross
income and is eliminated for adjusted gross incomes
of $117,750 and above. Married couples must file
jointly to be eligible for the exclusion.
