Using Savings Bonds to Pay Tuition

I have some EE savings bonds that qualify for college tuition payments without being taxed. Are they tax-free for graduate school, too?

Maybe, but only in very specific circumstances.

Interest earnings on savings bonds usually are subject to federal income tax. However, interest on Series EE and I bonds issued after 1989 can be tax-free when used to pay for qualified education expenses if you meet certain requirements. Your modified adjusted gross income must be below $124,700 if married; $78,100 if single in 2006. Married couples earning more than $94,700 and singles earning more than $63,100 can exclude only part of the interest. Your modified adjusted gross income is generally your adjusted gross income without taking into account any savings bond interest exclusion and a few other deductions. See IRS Publication 970, Tax Benefits for Education, for the full definition.

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To get this break, you also have to be at least 24 years old when the bond was first issued. And the money must be used for tuition and fees (room and board don't count).

Graduate school tuition is considered a qualified educational expense, but there could be a catch: The bond must be used for the bond owner, spouse, or a dependent whom you claim as an exemption on your return. If the bond is in your name and your child is no longer considered your dependent for tax purposes, then you can't get the savings bond tax break to help pay his or her grad school tuition.

You can use bonds you own for your own tuition, however, or you could even buy a new bond after age 24 and use it tax-free for your own grad school costs in the future.

For more information about saving for college, especially strategies for making the most of new tax law and financial aid rules, see The New Math of Paying for College. For more information about savings bonds, see the Treasury's savings bond Web site.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.