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IRS.gov Website
Publication 970
taxmap/pubs/p970-040.htm#en_us_publink1000178598

Chapter 10
Education Savings Bond Program(p65)


taxmap/pubs/p970-040.htm#en_us_publink1000273669Introduction

Generally, you must pay tax on the interest earned on U.S. savings bonds. If you don't include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds.
However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income.
taxmap/pubs/p970-040.htm#en_us_publink1000178602

Who Can Cash in Bonds Tax Free?(p65)

rule
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.
taxmap/pubs/p970-040.htm#en_us_publink1000178603

Qualified U.S. savings bonds.(p65)

rule
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 on the front of the savings bond.
EIC
The issue date isn't necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically).
taxmap/pubs/p970-040.htm#en_us_publink1000178605

Qualified education expenses.(p65)

rule
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 education expenses don't include expenses for room and board or for courses involving sports, games, or hobbies that aren't part of a degree or certificate-granting program.
  2. Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8).
  3. Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7).
taxmap/pubs/p970-040.htm#en_us_publink1000178608
Adjusted qualified education expenses.(p65)
You must reduce your qualified education expenses by all of the following tax-free benefits.
  1. Tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1).
  2. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7).
  3. Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8).
  4. Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as:
    1. Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1);
    2. Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1); or
    3. Employer-provided educational assistance (see chapter 11).
  5. Any expenses used in figuring the American opportunity and lifetime learning credits. See What Expenses Qualify in chapter 2 (American opportunity credit), and What Expenses Qualify in chapter 3 (lifetime learning credit), for more information.
taxmap/pubs/p970-040.htm#en_us_publink1000178617
Eligible educational institution.(p65)
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 U.S. 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.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
taxmap/pubs/p970-040.htm#en_us_publink1000178618
Dependent for whom you claim an exemption.(p65)
You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c.
taxmap/pubs/p970-040.htm#en_us_publink1000178619

Modified adjusted gross income (MAGI).(p65)

rule
For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. However, as discussed below, there may be other modifications.
taxmap/pubs/p970-040.htm#en_us_publink1000178620
MAGI when using Form 1040A.(p65)
If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction).
taxmap/pubs/p970-040.htm#en_us_publink1000178621
MAGI when using Form 1040.(p66)
If you file Form 1040, your MAGI is the AGI on line 38 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,
  3. Foreign housing deduction,
  4. Exclusion of income by bona fide residents of American Samoa,
  5. Exclusion of income by bona fide residents of Puerto Rico,
  6. Exclusion for adoption benefits received under an employer's adoption assistance program,
  7. Deduction for student loan interest,
  8. Deduction for tuition and fees, and
  9. Deduction for domestic production activities.
Use the worksheet in the instructions for line 9 of 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. Don't add in the deduction for (7) student loan interest and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. Enter the total on Form 8815, line 9, as your MAGI.
EIC
Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you can't 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), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. See Royalties included in MAGI under Education Savings Bond Program in Pub. 550, chapter 1.