Who Can Cash In Bonds Tax Free?

You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions.

• You pay qualified higher education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.
• Your modified adjusted gross income is less than $70,750 ($113,650 if filing a joint return).
• Your filing status is not married filing separate return.

Qualified U.S. savings bonds. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners).

The owner must be at least 24 years old before the bond's issue date. The issue date is printed directly on the front of the savings bond.

The date a bond is issued may be earlier than the date the bond is purchased.

Qualified higher education expenses. These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption.

1. Tuition and fees required to enroll at or attend an eligible educational institution. Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree program.
2. Contributions to a qualified state tuition program (see chapter 8).
3. Contributions to a Coverdell ESA (formerly known as an education IRA) (see chapter 4).

Expenses reduced by certain benefits. You must reduce your qualified higher education expenses by the amount of any of the following benefits received by the student.

1. Tax-free scholarships. See Publication 520.
2. Tax-free withdrawals from a Coverdell ESA (formerly known as an education IRA).
3. Any nontaxable payments (other than gifts, bequests, or inheritances) received for education expenses or for attending an eligible educational institution, such as:
1. Veterans' educational assistance benefits,
2. Benefits under a qualified state tuition program, or
3. Tax-free employer-provided educational assistance.
4. Any expenses used in figuring the Hope and lifetime learning credits.

Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Dependent for whom you claim an exemption. You claim an exemption for a person if you list his or her name on line 6c, Form 1040 (or Form 1040A).

Modified adjusted gross income. For most taxpayers, modified adjusted gross income (MAGI) is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion.

MAGI when using Form 1040A. If you file Form 1040A, MAGI is the AGI on line 19 of that form figured without taking into account any savings bond interest exclusion or student loan interest deduction.

MAGI when using Form 1040. If you file Form 1040, your MAGI is the AGI on line 33 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any:

1. Foreign earned income exclusion,
2. Foreign housing exclusion or deduction,
3. Exclusion of income for bona fide residents of American Samoa,
4. Exclusion of income from Puerto Rico,
5. Exclusion for adoption benefits received under an employer's adoption assistance program, and
6. Deduction for student loan interest.

Use the worksheet in the instructions for line 9, Form 8815, to figure your MAGI. If you claim any of the exclusion or deduction items(1)-(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet and enter the total on Form 8815, line 9, as your modified AGI.

Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you cannot figure the deduction until you have figured this interest exclusion. Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your modified AGI. See Royalties included in modified AGI under Education Savings Bond Program in chapter 1 of Publication 550.

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