Education Savings Bonds Program

One exclusive benefit of United States savings bonds is the Education Tax Exclusion (26 USC § 135), which allows qualified taxpayers to redeem their bonds tax-free if the proceeds are used to pay for certain educational expenses at qualified institutions. For tax-free treatment, the redeemed bonds must be Series EE or Series I bonds issued after 1989 to someone at least 24 years old, and who is responsible for the college tuition, and the college tuition must be paid in the same year that the bonds are redeemed. The money cannot be used for books or for room and board.

Bondholder Qualifications

Above those threshold amounts, the tax-free treatment starts phasing out, depending on filing status:

MAGI Thresholds for the Phaseout of the Tax-Free Treatment of Redeemed Bonds
Filing statusPhaseout
Threshold
Phaseout
Limit
2016
Joint Filers$116,300$146,300
All Others$77,550$92,550
2015
Joint Filers$115,750$145,750
All Others$77,200$92,200
2014
Joint Filers$113,950$143,950
All Others$76,000$91,000
2013
Joint Filers$112,050$142,050
All Others$74,700$89,700
2012
Joint Filers$109,250$139,250
All Others$72,850$89,700

If MAGI exceeds the phaseout limit, then the entire redemption amount is taxable – there is no tax savings.

To calculate the tax-free portion of the educational bond redemption when the MAGI exceeds the threshold:

Example: Tax-Free Portion of Education Bond Redemption Reduced by MAGI for a Single Taxpayer
Eligible Redeemed Bond Principal + Interest$10,000
MAGI$80,000
Phaseout Threshold$74,700
Phaseout Limit$89,700
Phaseout Reduction$3,533= Redemption Amount × (MAGIPhaseout Threshold)/(Phaseout LimitPhaseout Threshold)
Tax-Free Redemption Amount$6,467 = Redemption AmountPhaseout Reduction = $10,000$3,533

Bond Redemption Requirements

Qualified Education Expenses

Qualified educational expenses have the following requirements:

However, qualified educational expenses must be reduced by the amount of any tax-free portions of scholarships, fellowships, employer-provided educational assistance, and other forms of tuition reduction, by the expenses used to calculate the tax-free portions of Coverdell ESA's and qualified tuition programs, then by any expenses used to calculate the American opportunity credit or the lifetime learning credit. This result yields the adjusted qualified education expenses (AQEE).

All of the principal and interest must be used to pay qualified expenses. If bond redemption proceeds are greater than the qualified educational expenses, then the amount of interest that can be excluded from income is reduced pro rata:

Tax-Free Interest=Interest×Adjusted Qualified Education Expenses
Total Bond Redemption Amount (Principal + Interest)

Taxable Interest = Interest – Tax-Free Interest

Example: If bond proceeds equal $10,000 ($8,000 principal + $2,000 interest) and the AQEE are $8,000, 80% of the earned interest, which would equal $1,600 (= .8 × 2000), can be excluded from income. The remaining interest of $2,000$1,600 = $400 is taxable.