TAX TIP No. 66
'Educated' use of savings bonds earns tax break
But when you eventually
use these other savings to help pay for college, the
amounts withdrawn could affect the tax savings offered
by bonds. When figuring what you can pay with the bonds,
the IRS says you must reduce the expenses by the amount
of financial aid you get.
|Reduce expenses if you get aid from:
||Nontaxable payments, such as veterans' educational assistance benefits, disbursements from state tuition programs or tax-free educational aid from an employer.
cannot double dip. This means you cannot use bonds to pay expenses that you counted
in figuring any Hope
or Lifetime Learning tax credits that you claimed or that were paid with tax-free
Phasing out the tax break
If the savings bond amount you cash in is greater
than the actual educational costs you paid, then you can't exclude all of the
bond interest from taxes.
There also is a limit on how much bond interest is tax-free, depending on your income. On 2008 tax returns, single or head-of-household taxpayers who have modified adjusted gross income between $67,100 and $82,100 per year face a reduced tax exclusion. The range for married couples filing jointly is $100,650 to $130,650.
you make more than the top salary amount for your filing status, interest on your
savings bonds is fully taxable even when you use it for allowable educational
Filing and other paperwork requirements
Finally, to claim the interest exclusion
on savings bonds used for school costs, you have to report everything in the proper
manner to the IRS.
This break is not available to taxpayers
who use Form 1040EZ. You must file Form 1040A or Form 1040 and, if married, file
a joint return.
In addition, 1040A filers will have to complete
Schedule 1; 1040 taxpayers must file Schedule B. In either case, you'll also have
to fill out Form
8815 and attach it to your return.
The IRS recommends that
you keep bills, receipts, canceled checks or other materials that show you paid
qualified educational expenses in the year you claim tax-free bond interest. The
agency also suggests you keep a written record of each bond you cash, showing
the serial number, issue date, face value and total redemption proceeds -- principal
and interest -- of each. The IRS has designed a form for this, Form
8818. You don't have to file 8818 with your tax return, but it does provide
an easy way to track the data the IRS could ask for if it ever questions your
savings bond tax break.
So if you're preparing to use savings
bonds to pay college costs, do your tax homework and gather your documentation.
It will help ensure that more of your money goes to pay for that B.A. instead
of to the IRS.
Updated: April 8,