IRS has provided a number of incentives towards meeting your educational expenses. One of them is tax free interest on U.S. savings bonds. Remember the following points to check your eligibility:
- You can pay educational expenses for yourself, for your spouse or for your dependent.
- For claiming this benefit, your modified adjusted gross income must be less than $82,100.
- If you are married, your filing status should not be married filing separately.
- The bond should be of a series EE bond, which is a issued after 1989 or series I bond. The bond has to be issued in your name or in the joint name of you and your spouse. The holder must be minimum 24 years old on the date of issue of bonds. This date of issue is usually printed on the front side of the bond. This issue date may not be the date of purchase; it may be the first day of the month in which you purchase the bond.
- You should use the sale proceeds of the bond for qualified educational expenses. These expenses maybe for yourself or your spouse or your dependent. The following expenses will be treated as qualified education expenses for this purpose:
a. Tuition and fees required for enrolment. However you cannot include expenses on room and board, expenses on courses involving sports, games or hobbies which are not in your degree or certificate program.https://lms.eonreality.com/eportfolios/349/Home/2021_Updated_NS0592_Exam
b. Contributions towards a qualified tuition program (QTP)
c. Contributions towards a Coverdell education savings account.
While calculating the educational expenses, you must make a reduction of tax free scholarships, expenses met by distributions from a Coverdell account or expenses taken care of by distributions from a QTP. If you use for pen lifetime learning credits to meet part of the educational expenses, such amount will have to be deducted from qualified educational expenses under this program.
- The expenses must be towards courses of eligible educational institution which is recognized by U.S. Dept of Education. Certain institutions which are located outside United States and for participating in the U.S. department of education’s Federal student aid program can be considered as qualified educational institutions.
- If the amount you receive while cashing the bonds is less than the qualified educational expenses for the year, the total amount you receive will be exempt. However if the amount you receive is more than the qualified educational expenses, only part of the interest will be exempt. In this case you need to calculate the tax free amount. First, find out what is the amount of interest you have received. Then multiply it with the qualified educational expenses paid for the year and divide it by the total proceeds of bonds you have received in the year. The resulting figure will be your tax free interest for that year.
- If you claim the exemption for your dependent, his particulars must be entered on form 1040 or 1040A online 6c.
You need to use form 8815 to determine the exclusion amount of your interest on education savings bond. This form needs to be attached to your tax return.