Savings Bonds: Daughter-In-Law's Education Funding Solution?

EE savings bonds can be used to pay for education expenses, including those of a daughter-in-law. The Education Savings Bond Program permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and Series I bonds issued after 1989. The bond owner must be at least 24 years old when the bond is purchased, and the funds can only be used for tuition-related expenses, such as lab fees and degree-required courses.

Series EE and Series I bonds can be used for education

Series EE and Series I savings bonds are a great way to save for education. They are commonly used for education planning, and for good reason. The interest accrued on these bonds can be excluded from federal income taxes if used for qualifying education expenses. This means that the interest earned on these bonds can be tax-exempt, which is a significant advantage for taxpayers.

To qualify for this tax exclusion, there are some important rules to follow. Firstly, the bonds must be registered with the owner, who must be 24 years or older when the bond is issued. This is an important restriction, as it means that a bond registered with a child as the owner will not qualify, even when the child is college-aged. It is also important to note that the bonds must be issued after 1989 to qualify for this program.

The funds from the bonds can only be used for tuition-related expenses, such as lab fees and degree-required courses. They cannot be used for textbooks, room and board, or recreational activities. The expenses must be incurred at a qualified institution, recognised by the U.S. Department of Education, in the same tax year as the bond's redemption.

It is also worth noting that there are income limits for this strategy. For single filers, the threshold is typically around $96,000 to $97,000, while for joint tax filers, the threshold is usually around $150,000 to $175,000.

Overall, Series EE and Series I savings bonds can be a great way to save for education, providing tax advantages and a guaranteed return on investment.

The bond owner must be 24 years or older

To be eligible for the Education Savings Bond Program, the bond owner must be 24 years or older at the time of purchasing the bond. This is an important requirement, as it determines whether the interest accrued on the bond is tax-exempt. If a parent purchases the bond and registers it under their child's name, the bond will not qualify for tax exemption, even when the child is 24 or older and ready for college.

The age restriction is in place because the program is designed to benefit taxpayers by exempting all or a portion of the interest earned on eligible savings bonds from their annual gross income. The Internal Revenue Service recognises payments made to qualified institutions where the U.S. Department of Education has established student-aid programs. The funds from the redeemed bonds must be used solely for tuition-related expenses, such as lab fees and degree-required courses, and cannot be used for textbooks, room and board, or recreational activities.

To take advantage of the tax benefits offered by the Education Savings Bond Program, it is crucial that the bond is registered with an individual who is 24 years or older as the owner. This could be the parent, spouse, or another eligible individual. By doing so, taxpayers can exclude the interest on Series EE or I savings bonds issued after 1989 from their gross income if the funds are used for qualifying higher education expenses.

It is important to note that there are income limits associated with this strategy. For single filers, the modified AGI threshold is set at a certain level, while for married joint filers, the threshold is higher. Additionally, all payments made with bond proceeds must be reported to the IRS, and detailed records must be maintained.

In summary, the age requirement of 24 years or older for the bond owner is a key factor in determining eligibility for the Education Savings Bond Program. By adhering to this requirement and understanding the rules and limitations of the program, taxpayers can effectively utilise savings bonds to fund higher education expenses while benefiting from tax exemptions on the interest accrued.

The bond must be used for tuition-related expenses

The Education Savings Bond Program allows taxpayers to use their savings bonds for tuition-related expenses. The program applies to Series EE and Series I savings bonds issued after 1989. The bonds must be registered to the owner, who must be 24 years or older when the bond is issued.

The proceeds from the bonds can be used for qualified tuition and fees, such as lab fees and degree-required courses. However, they cannot be used for textbooks, room and board, or sports programs. It is important to note that the expenses must be incurred during the same tax year as the bond's redemption.

If the proceeds from the bonds are less than the amount of eligible expenses, all of the interest accrued on the bond remains tax-free. On the other hand, if the proceeds exceed the eligible expense amount, the amount of tax-exempt interest is prorated.

The Education Savings Bond Program offers a tax advantage, allowing taxpayers to exclude the interest on their bonds from their federal tax returns. This exclusion applies to single filers with a modified AGI of less than $96,100 to $97,350, and married filing joint filers with an AGI of $151,600 to $175,200.

The bond can be used for the owner, their spouse, or their dependents

The US government offers an education savings bond program that allows taxpayers to exempt all or part of the interest accrued on their savings bonds from their gross income. This program applies to Series EE and Series I savings bonds issued after 1989. The bonds must be registered in the name of the owner, who must be at least 24 years old at the time of purchase. If the owner is married, the bonds can be co-owned with their spouse.

The proceeds from the bonds can be used to pay for higher education expenses for the owner, their spouse, or their dependents. This includes tuition fees, lab fees, and degree-required courses. However, the funds cannot be used for textbooks, room and board, or sports programs. It is important to note that the expenses must be incurred during the same tax year as the bond's redemption, and any nontaxable education payments, education aid, or tax-free scholarships must be subtracted from eligible expenses.

To qualify for the tax exemption, the taxpayer must meet certain criteria. They must cash the savings bonds in the same tax year for which they are claiming the exclusion and pay the qualified higher education expenses in that same tax year. Additionally, their tax filing status must be anything other than "married filing separately." The taxpayer's modified adjusted gross income (MAGI) must also be below a certain threshold, which varies depending on their filing status and the year of the tax return. For example, in 2024, the exclusion for Series I and EE bond interest for single filers, heads of household, or qualifying surviving spouses began phasing out at $96,800 and ended at $111,800.

It is important to carefully consider the rules and criteria for the education savings bond program to ensure that the funds are used in a way that qualifies for the tax exemption. This may include complying with specific reporting and record-keeping requirements, such as maintaining itemized records of all redeemed bonds and using the forms designed by the IRS for this purpose.

The bond can be used for tax-free contributions to a Coverdell Education Savings Account

The Education Savings Bond Program allows taxpayers to exempt all or part of the interest accrued on their eligible savings bonds from their annual gross income. The bonds must be used to pay for higher education expenses, including tuition and lab fees, at qualified institutions. To qualify for this program, the savings bonds must be Series EE or Series I bonds issued after 1989, and the owner of the bond must be 24 years or older when the bond is issued.

The program has specific rules regarding eligibility and usage. The funds from the redeemed bonds can only be used for tuition-related expenses and cannot cover textbooks, room and board, or sports programs. Additionally, the expenses must be incurred during the same tax year as the bond's redemption, and any nontaxable education payments or scholarships must be subtracted from eligible expenses. It is important to note that the interest on the bonds may be subject to federal, state, and local income taxes if not used for qualifying education expenses.

The bond proceeds can be used to make tax-free contributions to a Coverdell Education Savings Account. This allows for a wider range of qualified education expenses, including room and board, books, and computer equipment. This strategy can be particularly attractive if the interest rate on the EE or I-bond is no longer competitive or is expected to decline. By rolling the bonds into a Coverdell Education Savings Account, individuals can maintain the tax benefits while expanding the range of qualifying expenses.

It is important to consult with a financial advisor or tax professional to understand the specific rules and regulations surrounding the Education Savings Bond Program and Coverdell Education Savings Accounts. They can provide personalized advice based on an individual's financial situation and help navigate the eligibility criteria and tax implications.

By utilizing the Education Savings Bond Program and the Coverdell Education Savings Account, individuals can take advantage of tax-free contributions and a wider range of qualifying expenses, making it a valuable option for saving for higher education.

Frequently asked questions