It is my understanding that I may purchase EE savings bonds for my daughter and she won't be taxed on the interest if she cashes them in and uses the money for college. I own the savings bonds in my name. Is it possible to gift them to her and then have her cash them in for her tuition bills so the interest will be tax-free?

Don't worry about handing the bonds over to her. In order to qualify for the tax break, the bonds must remain in your name. You can only get the tax exemption for college expenses if you were at least 24 years old when you bought the bonds, so students rarely qualify (unless the student is returning to school as an adult). Your child can be a beneficiary of the bond, but not a co-owner.

The interest is tax-free if you use the money to pay tuition (not books, room or board) or invest in a 529 plan or Coverdell education savings account for yourself, your spouse or a dependent for whom you claim an exemption -- which unfortunately eliminates the tax break for most other relatives. You also must redeem the bonds in the year you incur the expenses.

There are income qualifications to consider as well. You can only exclude all of the interest from taxes if you're married filing jointly and earn less than $89,750 in 2004. The tax break begins to phase out from there and disappears entirely if you earn more than $119,750. The phase-out for single taxpayers begins at $59,850 and ends at $74,850. (The cut-offs were slightly lower in 2003.)

For more information, see Savings Bonds for Education at the Bureau of the Public Debt's Web site and IRS Publication 970 Tax Benefits for Higher Education. For more college-savings strategies, see The ABCs of Saving.

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