Posted by James Financial Services Inc

What is an Education Savings Bond?

What is an Education Savings Bond?

An education savings bond program allows eligible taxpayers to exempt all or part of the interest earned on eligible savings bonds' redemption from gross annual income. Securities are tax-exempt when their owners use principal and interest to pay for higher education at qualified institutions, whether they attend themselves, their spouses, or their dependents.

Points to Note

  • An education savings bond program allows taxpayers to exempt some of the interest earned on redeeming qualifying savings bonds from their gross annual income.

  • Bonds cannot pay for books, rooms, meals, or sports programs.

  • The bondholder should be at least 24 years old at the time of purchase of the bond to qualify for this program.

  • The bond should only be used for course-related expenses, such as lab fees and university courses.

Investors must follow the following rules in order to take full advantage of this program: 

  • The security holder must be at least 24 years old at the time of acquisition. If a parent purchases the bond and puts it on behalf of a child under 24, the bond is not eligible.

  • When using a savings bond, all funds should cover the higher education expenses of owners, spouses, or dependents. The Internal Revenue Service (IRS) only recognizes payments made to qualified institutions where the US Department of Education has established student assistance programs.

  • Funds must only be used for educational expenses, including lab fees and courses requiring a degree. Funds cannot be used to cover expenses for food, books, or leisure activities. 

  • Buy-back bonds can also be used to contribute tax-free to a Coverdell education savings account.

  • Eligible study expenses must be incurred during the same fiscal year as the bond's redemption.

  • Any non-taxable payment for education, school aid, or free scholarships must be deducted from eligible expenses.

  • If the bonds' total income is less than the number of eligible expenses, all accrued interest on the deposit remains tax-free. However, if the bond's income exceeds the number of eligible expenses, the amount of interest, excluding tax, is proportional to proportional reduction.

  • The amount of non-taxable interest is based on the owner's modified adjusted gross income (MAGI). If the owner's MAGI reaches a certain limit, they may not be eligible for this program. For joint taxpayers as of 2017, this limit was $ 147,250. For individuals, the MAGI limit was $ 93,150. Married owners must file common taxes to qualify for the exemption.

  • All payments made with bond proceeds must be reported to the IRS along with itemized receipts. It is also vital to keep detailed records of all bonds redeemed. Taxpayers should use forms that the IRS has prepared specifically for this purpose.

Can I use my Savings Bonds to Pay for my education?

Exclusion from schooling applies to people who finance their university studies, their spouses, or children. To qualify for the exclusion, funds generated from using the bonds must be used to pay for tuition, fees, or materials for your undergraduate program courses. Books, computers, and rooms are not considered eligible educational expenses under this exclusion.

Also, the following conditions must apply:

  • The bonds were purchased by someone over 24 years old.

  • When you are used to paying for your child's education, the bonds remain in your name.

  • Your marital status for tax purposes is "single" or "married filing jointly."

Finally, there is an income limit to benefit from the exclusion.


Saving Bonds vs. 529 Plans

While government bonds are a safe investment, many people have opted for 529 plans since their inception in 1996. 529 Coverdell education programs and savings accounts offer the same tax benefits as those obtained under tax exclusion and offer countless advantages over economic captivity.

The ESA Coverdell 529 plans can be used for a wide range of educational expenses, including books, accommodation, and food, and are not considered FAFSA® resources. Savings Bonds, including EE and Series I Bonds, must be asset-registered with the FAFSA®, which will result in a higher score for the Expected Family Contribution. To be eligible for this program, the capitalization bonds must be EE or Series I bonds issued after 1989.

James Financial Services Inc
Contact Member