Figuring the Tax-Free Amount(p62)

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.

In February 2011, 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 2011, they paid $7,650 of their daughter's college tuition. They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Their MAGI for 2011 was $80,000.

$3,000 interest

×

$7,650 AQEE  $9,000 proceeds

=

$2,550 tax-free interest

They can exclude $2,550 of interest in 2011. They must pay tax on the remaining $450 ($3,000 − $2,550) interest.

The amount of your interest exclusion is gradually reduced (phased out) if your MAGI is between $71,100 and $86,100 (between $106,650 and $136,650 if your filing status is married filing jointly or qualifying widow(er) with a dependent child). 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.