The Benefits of Using Savings Bonds for College

Interest on bonds used for tuition may be tax-free, but you have to meet certain conditions.

My son is starting college in the fall. Can we use our savings bonds tax-free to pay for his college costs?

If you use I bonds and EE bonds issued after 1989 to pay college tuition, you don’t have to pay taxes on the interest you have earned, as long as you meet a few other conditions.

First, the bond owner must have been at least 24 years old when the bond was issued, and he must use the money to pay qualified education expenses (tuition and required fees, but not room and board or books) for himself, his spouse or a dependent. That means the bonds must generally be owned by the parent, not the child. The child can be a beneficiary of the bonds but cannot be a co-owner.

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Also, to take advantage of the break, your modified adjusted gross income for 2014 must be less than $113,950 for joint returns and $76,000 for single or head of household returns. The exclusion is completely phased out if your MAGI is $143,950 or more for joint returns or $91,000 for other returns.

“Modified adjusted gross income” in this context is the taxpayer’s adjusted gross income (before excluding the savings bond interest), with several exclusions and deductions, such as the deduction for student loan interest and for tuition and fees, added back in. See IRS Publication 970, Tax Benefits for Education, for the full definition. To claim the exclusion, file IRS Form 8815 with your 2014 taxes.

For more information about the rules, see TreasuryDirect’s Using Savings Bonds for Education factsheet.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

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.