Education Saving Bond Program

EDUCATION SAVING BOND PROGRAM

Some taxpayers can avoid paying tax on certain bond interest when they use the funds to pay for college expenses. If a taxpayer cashes qualified Series EE or Series I bonds and uses the money, or an equivalent amount from other sources, to pay qualified higher education costs for himself, his spouse, or his dependents, the interest will escape taxation, provided the taxpayer's income doesn't exceed certain levels. The exclusion is phased out for higher-income taxpayers. Qualified tuition and fees must be reduced by the amount of any nontaxable scholarships or fellowships used by the student.

To qualify for the exclusion, the bonds must be issued after 1989 and must have been purchased by an individual who was at least 24 years old on or before the bond's issue date. Gift bonds, however, don't qualify. For example, if the taxpayer purchases the bonds and puts them in his child's name, the exclusion is lost even if the child later redeems the bonds to pay college tuition. The same is true if the child's grandparents, for example, purchase the bonds and give them to the child's parents.

Example: Adriano Yosores, a grandfather, purchased Series EE bonds and gave them to her daughter on the condition that the proceeds of the bonds be used for her granddaughter college education. These bonds would not qualify for the exclusion. Adriano would be wiser to give the money to her daughter and have her daughter purchase the bonds, thus making them eligible for the exclusion when the granddaughter goes to college, assuming all other qualifications are met. Note: Adriano's granddaughter may, if she owns the bonds and if she qualifies, elect to report the interest income annually, as discussed earlier. This strategy may reduce or eliminate his overall tax burden regarding bonds.

Exclusion - Specific condition, circumstance, or situation usually listed in a contract as being not covered. All contracts (including insurance policies and construction contracts) contain exclusions, expressly or by implication.

Who May Take the Exclusion

You may take the exclusion if all four of the following apply:

1. You cashed qualified U.S. savings bonds in 1999 that were issued after 1989
2. You paid qualified higher education expenses in 1999 for yourself, your spouse, or your dependents.
3. Your filing status is any status except married filing separately.
4. Your modified AGI (adjusted gross income) is less tha: $68,100 if single or head of household; $109,650 if married filing jointly or qualifying widow(er).

Note: The amount above subject to change (that is only example for 1999 tax year).It depend the amount of current year.

U.S. Savings Bonds That Qualify for Exclusion

To qualify for the exclusion, the bonds must be series EE or I U.S. savings bonds issued after 1989 in your name, or, if you are married, they may be issued in your name and your spouse's name. Also, you must have been age 24 or older before the bonds were issued. A bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child.

Record-keeping Requirements

Keep the following to verify the amount of interest you excluded.

• Bill, receipts, canceled checks, or other documents showing you paid qualified higher education expenses in 1999.
• A written record of each post-1989 series EE or I bond that you cash. Your record must include the serial number, issued date, face exceeds these levels. It also isn't available for taxpayers using the married filing separately status.