Scott Gottlieb, CPA


105 Maxess Road, Suite N116
Melville, New York 11747

Office: 631-574-4484 or 631-253-CPA2
scott@gottliebcpa.com

 
 
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Newsbytes

July 2003
Buying U.S. Savings Bonds for Education

With another school year fast approaching, it is never to early to save for your childrens college education. Below find out about the Treasury Departments "Education Bond Program". If you need any other information, please feel free to come in for a consultation.

Introduction.
In 1990, the Treasury Department announced the "Education Bond Program." This program allows interest to be completely or partially excluded from Federal income tax when the bond owner pays qualified higher education expenses at an eligible institution or State tuition plan in the same calendar year the bonds are redeemed. Payments to State tuition plans have been eligible since January 1, 1998.

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 whom 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. 2002 income limitations follow.

Tax Year 2002 Income Limits:
For single taxpayers, the tax exclusion begins to be reduced with a $57,600 modified adjusted gross income and is eliminated for adjusted gross incomes of $72,600 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $86,400 modified adjusted gross income and is eliminated for adjusted gross incomes of $116,400 and above. Married couples must file jointly to be eligible for the exclusion.
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.

 

 

 

 

 

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The materials on this Web site are for informational purposes only and are not intended and should not be construed as accounting advice. This information is not intended to create, and receipt of it does not constitute, a CPA-Client relationship. You should not act upon this information without seeking counsel from a Certified Public Accountant