Normally, the interest you earn on your savings bonds becomes part of your gross income for tax purposes. Under certain conditions, though, you can avoid taxes on the interest by using it to pay for higher education.
Which savings bonds qualify?
Series EE or I savings bonds issued after 1989.
They must be registered with you as the owner. If you are married, they may be registered with you and your spouse as owners.
Important: Note the age restriction in the next section. The owner of the bond must be 24 years or older when the bond is issued. Therefore, a bond registered with a child as owner will not qualify even years later when the child is ready for college. If you want to buy savings bonds to later get this tax exclusion for a child's higher education, you must register the bonds with yourself, or yourself and your spouse, as owners.
What other restrictions apply?
You can take the tax exclusion if you meet all of these conditions:
- You were 24 years old or older before the bonds were issued.
- Your modified adjusted gross income is less than the cut-off amount that the IRS sets for the year in which you want to take the exclusion. The cut-off amount may change each year. You can find the current cut-off amount on IRS Form 8815.
- You cash the qualifying savings bonds in the same tax year for which you are claiming the exclusion.
- You paid qualified higher education expenses to an eligible institution that same tax year. (The instructions that come with IRS Form 8815 explain both "qualified expenses" and "eligible institution." They also tell you what records you must keep.)
- The expenses were for yourself, your spouse, or someone you list as a dependent on your federal income tax return.
- You file your IRS tax return with any status EXCEPT married filing separately.
Where can I find more information?
IRS Form 8815 gives details and instructions.
How do I get the tax exclusion?
If you meet all the conditions, fill out IRS Form 8815 and submit it with your tax return.
FAQs
The federal government allows qualified holders of Series I bonds – and Series EE bonds, too – to exclude from their income any interest paid when the bonds are cashed as long as the bond owner pays qualified education expenses at an eligible educational institution.
Can you use I bonds for higher education? ›
Series EE and Series I U.S. Savings Bonds, which are available from the U.S. Treasury Department, offer a low-risk and modest-return investment for college saving.
Do you pay taxes on bonds if used for education? ›
The bonds become tax exempt when their owners use both the principal and interest to pay for higher education at qualified institutions, either attended by themselves, their spouses, or their dependents.
What are the restrictions on TreasuryDirect I bonds? ›
Is there a maximum amount I can buy? In a calendar year, one Social Security Number or one Employer Identification Number may buy: up to $10,000 in electronic I bonds, and. up to $5,000 in paper I bonds (with your tax refund)
How do bonds work in education? ›
A school district gets consent from voters to raise taxes to pay for a loan or a bond. A financial institution sells the bonds, another name for an IOU, and gives the money to the school district. The tax money pays back the bond and the interest over several years to the bondholders.
How do you avoid tax on treasury bonds? ›
The Treasury gives you two options:
- Report interest each year and pay taxes on it annually.
- Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
Designed to provide private university financing that can be used to purchase equipment or build and improve campus facilities.
What are the limitations of I bonds? ›
The maximum amount you can invest in an I bond is $10,000 per person per year. If you and your spouse both invest $10,000, that's your maximum until a year later. Interest is taxable. The interest on I bonds is subject to the Federal income tax, which depends on your income.
What are qualified higher education expenses? ›
Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period* that starts during the tax year or the first three months of the next tax year.
What type of investment is not taxed if used to pay for education? ›
Tax Advantages of 529 Plans
Withdrawals from a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. You need to invest in your home state's plan if you want a state tax deduction or credit.
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
If you invest in TreasuryDirect, your 1099 will be available electronically and you can print the form from your account. 1099 forms are available by January 31 of each tax year.
Is there a downside to I bond? ›
The cons of investing in I-bonds
There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.
What is the best time to cash out an I bond? ›
Remember, when you cash out your I Bonds you don't earn the interest until you complete the month and that you lose the prior 3 months' interest. If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and.
What does C of I mean in TreasuryDirect? ›
The Zero-Percent Certificate of Indebtedness (Zero-Percent C of I or simply, C of I) is a Treasury security that does not earn any interest. It is intended to be used as a source of funds for purchasing traditional Treasury securities.
What bonds can be used for education? ›
Interest earned on I bonds can be excluded from federal taxes when used for qualified education expenses paid for the taxpayer, a spouse, or a dependent at a postsecondary educational institution. The exclusion is calculated as a pro rata amount of qualified education expenses divided by the redemption proceeds.
What can you do with Treasury bonds? ›
You can hold a bond until it matures or sell it before it matures. EE Bonds, I Bonds, and HH Bonds are U.S. savings bonds. For information, see U.S. Savings Bonds.
Can I use bonds for grandchildren education? ›
A grandparent might prefer to purchase U.S. Savings Bonds to help contribute to a grandchild's education. Pros: These are incredibly easy to purchase online and provide guaranteed interest when they mature—but note: that can take years.
Which US savings bonds are eligible for the education savings bond program? ›
Which savings bonds qualify? Series EE or I savings bonds issued after 1989. They must be registered with you as the owner. If you are married, they may be registered with you and your spouse as owners.
