Dear Dr. Don,
My 19-year-old daughter is in college. I have a few Series EE savings bonds and Series I bonds, which I have held for more than five years. I would like to cash them in next year and use the proceeds toward my daughter’s education. Will I have to pay taxes on the interest income if I show that I used this to pay my daughter’s room and board?
— Nina No-Taxes
Unfortunately, textbooks and room and board are not considered qualified higher education expenses for the savings bond education tax exclusion. Qualified educational expenses include tuition and fees. Expenses paid for sports, games or hobbies qualify only if part of a degree or certificate program. The amount of qualified expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance and other forms of tuition reduction.
The savings bonds have to qualify for the education tax exclusion, and you have to qualify to use the exclusion. For the savings bonds to qualify, you had to be at least 24 years old on the first day of the month in which you bought the bonds. 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.
For you to qualify to use the education tax exclusion from a tax perspective, if you’re married, you must file a joint return and you must meet certain income requirements. The income limitations apply in the tax year you use bonds for educational purposes, not the year when you bought the savings bonds. The education tax exclusion benefits are phased out for joint or single filers with modified adjusted gross income that exceeds the limit. The limits are adjusted every tax year.
You have to spend the principal and interest income on qualified education expenses to take advantage of this exclusion.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser
To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.