U.S. Savings Bond Interest

[Janitor Bob]

student/client (age 21) redeemed Series EE savings bonds and used the proceeds to help pay for college. The savings bonds were purchased (in student/client's name) by her late grandfather many years ago. I know the interest is not subject to state/local tax, but is it necessarily taxable by IRS? I had thought that there was an exemption/exclusion for proceeds used for college....but in reading the rules for that, she does not seem to be elibible....since they were issued in her name. It appears that the proceeds would have been tax-free ONLY if issued in parent's name and used for her education....correct?

[Yardley CPA]

Janitor Bob, I believe you hit the nail on the head with your last sentence. I also believe that it would be tax free if issued in the parents name, but since they are issued in the student's name, they are not tax free (not 100% sure though.)

Maybe someone will chime in on this.

Here's a link from Publication 970 with some additional information. Take note of the "Example" toward the bottom.

http://www.irs.gov/publications/p970/ch10.html

[Janitor Bob]

Student/client just double checked with her father....he clarified that the bonds owner was listed as "Father OR student/client". It looks like it still does not qualify for tax free because although student can be a beneficiary, they cannot be listed as a owner (or co-owner) of the bonds.

I am trying to be sure...because although the student/client trusts and believes me, the father knows just enough about taxes to be dangerous and he is just SURE that this is tax-free because his father that purchased the bonds told him so.

[SCL]

hey jbob, give us the complete story.

under whose soc sec # is the fm1099int issued &

how much is the amount in box 3 of fm1099int?

[Janitor Bob]

1099-INT is under student's name and SSN. The amount in box 3 is $1,500.00

[Janitor Bob]

Also....It looks like IF you otherwise qualified to exclude the interest used for education, you would need to reduce the qualified education expenses by the amount already claimed for education credits....So if otherwise qualified, we can chose to use education expenses ($2,000 in this case) for either education credits such as AOC OR the exclusion of savings bond interest....but not both.

what if total eligible education expenses was $10,000? Could you use a certain amount of that $10,000 to maximize AOC then use the remainder to exclude savings bond interest?

[RitaB]

I think you'll find everything you need in Pub 970, and Instructions to Form 8815. Sorry, it's been awhile, but it's not as easy as it sounds when you buy the bonds. Good article:

http://www.savings-bond-advisor.com/the-fine-print-of-the-us-savings-bond-college-education-deduction/

[SCL]

Student/client just double checked with her father....he clarified that the bonds owner was listed as "Father OR student/client". It looks like it still does not qualify for tax free because although student can be a beneficiary, they cannot be listed as a owner (or co-owner) of the bonds.

I am trying to be sure...because although the student/client trusts and believes me, the father knows just enough about taxes to be dangerous and he is just SURE that this is tax-free because his father that purchased the bonds told him so.

i cannot get beyond establishing the initial facts...let alone a question of the taxable income/tax liability of the student/dep...or who claims the personal exemption and potential tuition tax credit.

so, the ebond, fm1099int was issued in the name and soc sec number of the student/client...yet the hearsay crowd (the father) claims otherwise?

[Janitor Bob]

Well I did not actually see any bonds, but the statement from the bank showing face value and interest as well as the 1099-INT all have ONLY the student's name and SSN. So I am pretty sure on this one that nobody can exclude the interest. However, my next client (mom who purchased bonds many years ago and has redeemed them to help pay for daughter's college) will qualify......with the twist that she is using education expenses for the AOC.

So my questions can a portion of the qual. education expenses be used to get the max AOC, then the remainder of education expenses be used to exempt the EE savings bond interest?

[RitaB]

So my questions can a portion of the qual. education expenses be used to get the max AOC, then the remainder of education expenses be used to exempt the EE savings bond interest?

Yes, but it's not all cut and dried, there is a little bit to that Form 8815, it has been a few years since I did one, but look at line 7, you may not get a dollar for dollar exemption of the interest.

[Janitor Bob]

Thanks RitaB! I glanced at the 8815 late last night and quickly realized that there was a little more to it than I thought....I'll tackle it later when I can devote more time to it. The first thing I saw noticed that I need to have the face value of the bonds....not just the interest. This particular client only gave me the 1099-INT that lists the interest but not face value......As usual, more info needed from client.

[RitaB]

You're welcome, and I'm sorry I couldn't remember exactly what was what, but I recall that it's not as easy as people think. Yeah, they never give you enough info. Just like my farmer who "sold my John Deere for the payoff". And all the people who sell real estate: "but the check was only blah, blah, blah".