As college tuition becomes more and more expensive, parents are continuously looking for the best ways to help their children pay for school. Enter savings bonds. If you meet certain conditions, the interest used on bonds may be tax free, potentially saving you a bundle. Here’s what to keep in mind if you decide to use savings bonds to help pay for your child’s schooling.
Kiplinger writes that you can use I Bonds and EE bonds, which were issued after 1989, to pay for college tuition. This allows you to avoid paying taxes on the interest you have earned. But there are several qualifications you need to meet in order to avoid taxes, so make sure you meet these conditions.
- The bond owner must have been at least 24 years old when the bond was issued. In addition, the owner must be using the money to pay qualified education expenses, meaning tuition and required fees. Note: This doesn’t include expenses for room and board or books. The owner must also either be using it for his or her own education, a spouse’s, or a dependent’s. This typically means that a parent must be the bond owner — a child can be a beneficiary but not the co-owner if you’re hoping to qualify for the tax-free benefit.
- The other thing to keep in mind is your modified adjusted gross income, which in this context is the taxpayer’s adjusted gross income with a few exclusions and deductions added back in. For 2014, your modified adjusted gross income must be less than $113,950 for joint returns and $76,000 for single or head of household returns. The exclusion is completely phased out if your MAGI is $143,950 or more for joint returns or $91,000 for other returns. Simply put, if you make too much, you won’t be eligible for the tax break.
MarketWatch writes that if a parent makes too much but the bonds were actually intended to be given to the child as a gift and is in his or her name, the child should actually be able to cash them and report the income as his or her own, at a rate that’s most likely significantly lower than the parents.
There’s another thing to be aware of here, though. Your child could then be subject to “kiddie tax,” meaning if he or she younger than 24 and receives at least half of his or her financial support from parents, investment income of more than $1,900 would be taxed at the parents’ marginal rate, rather than the child’s lower rate. You should be able to avoid this by redeeming the bonds gradually each year so that you don’t hit the $1,900.