The Income Restrictions on EE Savings Bonds Used in Education
You can exclude the interest from EE savings bond issued after 1989 if you meet certain criteria and you use the money on qualified higher education expenses like tuition at a college or trade school. Besides having your income fall below the annual limits, you must have bought the bond when you were at least 24 years old and be paying qualifying educational expenses for yourself, your spouse or your dependent.
The IRS limits who can take advantage of the savings bond exclusion based on your modified adjusted gross income. As of 2012, if you're married filing jointly, you can't exclude any of your savings bond interest if your MAGI exceeds $139,250. If you're single, you can't exclude any interest if your MAGI exceeds $87,850. If you're married filing separately, you're not allowed to use the savings bond exclusion regardless of your income.
The income limits also include phaseout ranges, rather than all-or-nothing limits. If you fall in the phaseout range, only a portion of your savings bond interest can be excluded. For example, if you fall smack-dab in the middle, you can only exclude half the eligible savings bond interest for that year. As you get closer to the top of the phaseout range, that portion goes down. For 2012, the phaseout range for joint filers is $109,250 to $139,250. For singles, it is $72,850 to $87,850.
To calculate your MAGI, start with your adjusted gross income before taking into account any exclusion of savings bond interest. Then, add back any exclusions or deductions you claimed for foreign earned income or housing, income from Puerto Rico or American Samoa, employer-provided adoption benefits, student loan interest, tuition and fees and domestic production activities. For example, say your AGI before excluding any savings bond interest is $80,000. If you claimed a $4,000 tuition and fees deduction, add back that $4,000 so your MAGI is $84,000.
To figure the exclusion, you need to file Form 8815 with your income taxes. This form is also used if you need to calculate a prorated exclusion because your income falls in the phaseout range. Then, when filling out Schedule B, the form used to report all your sources of interest income, include the savings bond interest on line 1, but report the excluded amount on line 3. The result is the savings bond interest doesn't add to your taxable income for the year.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."