The Education Savings Bond Program is a federal tax benefit designed to encourage saving for higher education by reducing the tax burden on interest earned from certain U.S. Treasury savings bonds. Specifically, it allows eligible taxpayers to exclude interest earned on Series EE and Series I savings bonds when the bonds are redeemed and the funds are used to pay for qualified education expenses.
Background and History
This program was created as part of the U.S. tax code to support families in affording postsecondary education. It applies only to bonds issued after 1989 and aims to make education savings more tax-efficient.
How the Program Works
When you buy Series EE or Series I bonds, the interest accumulates tax-deferred until you redeem the bonds. Normally, this interest is subject to federal income tax in the year of redemption. However, if you use the redeemed funds to pay qualified education costs, you can exclude the interest from your gross income, lowering your federal tax bill.
To qualify, taxpayers must meet several conditions:
- The bonds must be registered in your name or your spouse’s name if filing jointly.
- You must have been at least 24 years old when the bonds were issued.
- The redeemed proceeds must be spent in the same year on qualified tuition and fees at eligible postsecondary institutions.
- Your modified adjusted gross income (MAGI) must fall below IRS-established limits.
Unlike federal tax rules, most states neither tax this interest nor have separate exemptions.
Qualified Education Expenses
Qualified expenses include tuition and fees required for enrollment or attendance at accredited universities, colleges, vocational schools, or other eligible postsecondary institutions. However, expenses like room and board, books, transportation, and supplies generally do not qualify.
Income Limits for the Tax Exclusion
For tax year 2024, the IRS set these income thresholds:
| Filing Status | Full Exclusion up to | Phase-out Start | Phase-out End |
|---|---|---|---|
| Single | $85,800 | $85,800 | $100,800 |
| Married Filing Jointly | $128,650 | $128,650 | $158,650 |
Taxpayers with MAGI above phase-out end limits cannot claim the exclusion. Limits are subject to annual adjustments.
Eligibility
Eligible bondholders meet the following:
- Own Series EE or Series I U.S. savings bonds issued after 1989
- Were at least 24 at issuance
- Use redeemed proceeds for qualified higher education expenses
- Meet IRS income requirements
The tax exclusion can apply when paying for education for the bond owner, spouse, or dependents claimed on the tax return.
Real-World Example
Suppose you purchased $10,000 in Series EE bonds several years ago that have earned $2,000 in interest. In the year your child attends college, tuition costs total $12,000. Redeeming the bonds and applying the funds to tuition lets you exclude the $2,000 interest from federal taxable income, potentially reducing your yearly tax liability.
Tips for Maximizing Benefits
- Plan bond redemptions to coincide with the year you pay qualified education expenses
- Keep detailed records of education costs and bond purchases
- Use IRS Form 8815 to claim the Education Savings Bond interest exclusion on your federal tax return
- Review annual income limits to ensure eligibility
Common Misconceptions
- Not all savings bonds qualify; only Series EE and I bonds issued after 1989 are eligible.
- Education expenses must be qualified tuition and fees, excluding room, board, and other ancillary costs.
- The owner must have been at least 24 years old at issuance — bonds bought before this do not qualify.
- Interest exclusion can only be claimed if bonds are redeemed and proceeds fully used for qualifying expenses in the same tax year.
FAQs
Q: Does the program cover K-12 education expenses?
No, the exclusion only applies to qualified higher education expenses.
Q: Are state taxes impacted by this program?
Generally, states follow federal tax treatment and do not tax the interest from these savings bonds.
Q: Can I use bonds I own to pay for a dependent’s education?
Yes, if the dependent is claimed on your tax return and the expenses are qualified.
Additional Resources
The Education Savings Bond Program provides a valuable opportunity to reduce federal income tax liability while saving for college and other qualified education expenses. Understanding the eligibility requirements and proper use can help families keep more of their savings for education.
