US Savings Bonds for Education

If you are concerned about how you are going to pay for your child's education, you can use U.S Savings Bonds for education to help pay some of the cost.

When you are using Savings Bonds for education, you do not have to pay taxes on the interest that is earned since money received for education is not taxable anyway. However, you must use the money toward your child's education the year that the bonds are cashed in. The education costs must be equal to or greater than the amount of the Savings Bond so that you are completely exempt from paying taxes on the interest.

Savings Bond Exclusions

There are a number of exclusions when using Savings Bonds for education. First, you do not have to state that you are using a Savings Bond for education when you buy it. Since the income received from a Savings Bond is not taxed until it is cashed in, you don't have to worry about taxes. It is after you cash it out and declare on your income tax return that it was used for education that you will worry about this. This means that you can choose later on that you do not want to use the Savings Bonds for education, even if you originally planned to use them for that very reason.

You do need to make sure that you do not register the bond in your child's name. Any bonds used for education, such as treasury debt bonds, need to be registered in your name because the bonds will be claimed on your tax return. Your child cannot even be listed as a co-owner, but can be listed as a beneficiary in the instance of your death. If this does occur, the exclusion that says your child cannot own a bond used for education does apply. This means that taxes will need to be paid on the interest when the bonds are cashed in.

Taxes

You should know that the income tax exclusion does not apply to everyone who uses Savings Bonds for education. The rules change each year, but it is common for individuals above a specific tax bracket to not qualify for the tax exemption. Even when using the Savings Bonds for education, the taxes must be paid.

The amount of income that a person must make before they are excluded from being tax exempt depends upon marital status. Married couples are given a little more room than single individuals. Whatever the exclusions, they apply the year that the bonds are cashed in and not the year that the bonds are purchased.

Education

In order to receive the tax exemption, certain educational expenses apply. You can use your Savings Bond funds on any educational program that includes tuition, lab fees, test fees, sports team costs, and even hobby expenses related to schooling. Excluded expenses include books, writing utensils, and room and board.

A tip that you may want to use is to purchase U.S. Savings Bonds for education in small increments. This helps you to have control over how much is spent. For instance, cashing out more than the actual educational amount can result in having to pay taxes on the remainder of the interest income. By cashing out in small amounts, you can eliminate an overage or you can minimize it.

So when you want an easy way to save for education, Savings Bonds can be your answer. You can start saving years ahead of time and invest as much as you can or as much as you want at a time. This will lift a considerable burden off of you and off of your child.

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