Education Bond Program

Eligible Bonds. Series EE bonds issued January 1990 and later, along with all Series I Bonds, are eligible for this program. You aren't required to indicate that you intend to use the bonds for educational purposes when you buy them, but make sure you meet the program's requirements, some of which apply when you buy the bond(s).

Requirements. To qualify, you must be at least 24 years old on the first day of the month in which you bought the bond(s). When using bonds for your child's education, the bonds must be registered in your name and/or your spouse's name. Your child can be listed as a beneficiary on the bond, but not as a co-owner. When using bonds for your own education, the bonds must be registered in your name. If you're married, you must file a joint return to qualify for the exclusion.

Eligible Institutions. Post-secondary institutions, including colleges, universities, and vocational schools, that meet the standards for federal assistance (such as guaranteed student loan programs) qualify for the program.

Qualified Expenses. Qualified educational expenses include tuition and fees (such as lab fees and other required course expenses). The expenses may be for the benefit of you, your spouse, or a dependent for which you claim an exemption. Expenses paid for any course or other education involving sports, games, or hobbies qualify only if required as part of a degree or certificate-granting program. The costs of books and room and board aren't qualified expenses. (Qualified State tuition plans are also included among eligible expenses.) The amount of qualified expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other forms of tuition reduction. Expenses must be incurred during the same tax year in which the bonds are redeemed. You must use both the principal and interest from the bonds to pay qualified expenses in order to exclude the interest from your gross income. If the amount of eligible bonds you've cashed during the year exceeds the amount of qualified educational expenses paid during the year, the amount of excludable interest is reduced pro rata. Example: Assuming bond proceeds equal $10,000 ($8,000 principal and $2,000 interest) and the qualified educational expenses are $8,000, you could exclude 80 percent of the interest earned, which would equal $1,600 (.8 x 2000).

Income limitations. The full interest exclusion is only available to married couples filing joint returns, or to single filers, with modified adjusted gross income (which includes the interest earned) under a certain limit. These income limits apply in the year you use bonds for educational purposes--not the year you buy the bonds. Exclusion benefits are phased out for joint or single filers with modified adjusted gross income that exceeds the limit. 2003 income limitations follow.

Tax Year 2003 Income Limits: For single taxpayers, the tax exclusion begins to be reduced with a $58,500 modified adjusted gross income and is eliminated for adjusted gross incomes of $73,500 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $87,750 modified adjusted gross income and is eliminated for adjusted gross incomes of $117,750 and above. Married couples must file jointly to be eligible for the exclusion.

Tax Year 2004 Income Limits: For single taxpayers, the tax exclusion begins to be reduced with a $59,850 modified adjusted gross income and is eliminated for adjusted gross incomes of $74,850 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $89,750 modified adjusted gross income and is eliminated for adjusted gross incomes of $119,750 and above. Married couples must file jointly to be eligible for the exclusion.