Dear Dr. Don,
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This is a bad news, good news situation that I'm asking about. I just received several Series EE and Series I savings bonds. I am the so-called payable-on-death beneficiary on the bonds. My mom, who purchased the bonds, recently passed away. Can I cash them in and use them for my daughter's college fund without getting hit with a big tax bill? I think my mom would be happy to see the money being put to such good use.
-- Sherri Savings
Dear Sherri, Put another way, you want to know, as the payable-on-death beneficiary, if you can use the federal education tax exclusion to cash in the savings bonds to pay for your daughter's college costs. The beneficiary angle puts an interesting wrinkle on the question, so I worked with the customer service specialists at the U.S. Treasury Department to find you the answer.
The answer is a conditional "yes" as long as the bonds were purchased after 1989 and if you are married and if you file a joint income tax return. Also, your modified adjusted gross income must be below the limits for the tax year you redeem the bonds to pay for qualified higher education expenses. The exclusion is reduced past a base level modified adjusted gross income and is eliminated at the upper limit for income in that tax year.
The Treasury Direct website explains the exclusion and the qualified expenses that you can spend the proceeds on while using the exclusion. You'll capture the tax break while financing your daughter's college expenses and celebrate you mother's memory all at the same time.
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