Pay Taxes on Savings Bonds for College?

Dear Dr. Don,

My aunts and uncles bought numerous savings bonds for me while I was growing up. Now that I'm finally going to college, I'd like to know the tax implications of cashing these in.

I understand there is an education program for the bonds, but I'm confused as to my eligibility. The U.S. Treasury website says I must have been at least 24 on the dates of purchase, but this seems odd. Am I reading it wrong? I do not currently have an income. I am 25 and will be cashing in less than $10,000. Do I qualify for the program?

- Joe Juncture

Dear Joe,

If you're the listed owner of the savings bonds, you don't qualify to participate in the Education Savings Bond Program. When the education tax exclusion is used in funding the child's education, parents must buy the savings bonds in their own names. While the child can be listed as a beneficiary, he can't be listed as the co-owner. To use the deduction for bonds owned in your name, you had to be at least 24 when you bought the bonds.

If your aunts and uncles had purchased the savings bonds in your parents' names and your parents were at least 24 when the bonds were purchased, the education tax exclusion may be applicable. There are still other hoops to jump through in that the parents' income can't exceed a certain level for them to be eligible for the exclusion in the year the savings bonds are redeemed to pay qualified education expenses.

Because you don't expect to have much earned income in the 2012 tax year, cashing in $10,000 worth of savings bonds won't have a big impact on your 2012 income taxes.

I'd suggest plugging your savings bonds into the Savings Bond Wizard on the TreasuryDirect website. The Wizard will tell you the current yield on each bond, its interest earnings to date and the next interest payment date. It'll help you decide which of the bonds in your portfolio should be redeemed first. In general, you want to redeem a bond in the month it receives an interest payment for savings bonds issued prior to May 1, 1997, because that's when the last six months' interest is credited to the savings bond. Good luck with school.

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