If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free.
To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. The denominator (bottom part) of the fraction is the total proceeds you received during the year. taxmap/pubs/p970-053.htm#en_us_publink1000178624
In February 2009, Mark and Joan Washington, a married couple, cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. In 2009, they paid $7,650 of their daughter's college tuition. They are not claiming an American opportunity, Hope, or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Their MAGI for 2009 was $80,000.
|×|| $7,650 AQEE |
They can exclude $2,550 of interest in 2009. They must pay tax on the remaining $450 ($3,000 − $2,550) interest.taxmap/pubs/p970-053.htm#en_us_publink1000178626
The amount of your interest exclusion is gradually reduced (phased out) if your MAGI is between $69,950 and $84,950 (between $104,900 and $134,900 if your filing status is married filing jointly or qualifying widow(er)). You cannot exclude any of the interest if your MAGI is equal to or more than the upper limit.
The phaseout, if any, is figured for you when you fill out Form 8815.