My kids have some savings bonds from their births and gifts dated in the 90’s. Some are in my name and soc with them as the beneficiaries, some are in their name and soc. What can you tell me that I need to know about using them toward tuition? Tax ramifications things of that nature. We’re not talking a lot of $$ maybe 2k for each kid.
I am confused. It looks as though I can cash a savings bond in my name for education of my dependent college student as long as I meet certain income levels and am not taking any type of tuition tax credit.
What if I also use her 529 plan that year to pay tuition?
However, all our bonds are in my kid’s name. Is that ok? Is it the same as if it were in my name?
What if my kid files her own taxes for summer job income but I have her as a dependent on my taxes?
On CSS I would assume this would either go as income for me or her or untaxed income if there is no tax on the interest.
Education expenses paid from a 529 account cannot be used to qualify for the savings bond tax benefit.
From IRS pub 970:
*Qualified U.S. savings bonds. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners).
The owner must be at least 24 years old before the bond’s issue date. The issue date is printed on the front of the savings bond.*
Not sure what you’re asking here.
For all the tuition credits and benefits, remember it is one use only. If you pay tuition with 529 money, you cannot also take those same QEE amounts for an AOTC. No double dipping. You can use 529 money to pay for room an board so that the best way to use it to preserve QEE for the other credits.
One bite.
Yes but lets say Tuition is 45k. After FA (scholarships, all loans work study grants) the balance is 30k which I pay 10k from the 529 plan I own in D’s name, 1k in savings bonds (in my name, not my child’s since that is taxable) and the balance in a check from my personal checking account for $19k). In that situatiotn since it was different money I have no income on the 10k from the 529, the 1k from savings bonds and I assume I can take a federal tax deduction or credit on some part of the $19k I paid out of pocket? (first year doing this, have not researched tuition tax credits yet.) I that the $5k credit? Thank you
The AOTC is capped at $2500 for $4000 in QEE (tuition fees book) that is not otherwise benefitted. I don’t know what $5000 tax benefit you are talking about.
There was a formula in the link to tax publication 970 . Any scholarships? Do you qualify for the AOTC (income under $80k/single, $160k/joint filer)? How much interest on the bonds.
Sorry, as I said, never tried to claim this. I was incorrectly assuming it was $5000, you are correct it is $2500.
Most of our bonds are in kid’s names so that will not help us. I think we may have one or two in our names. Would probably have to find them!
So it sounds like the take away from this is if the bonds are in parents name we can use them interest-free(as long as under the income limits etc), if they are in the kids name we should wait till the kid is 24 to use for tuition, maybe save for grad school.
@SeekingPam, when you say $45 k tuition, do you mean just tuition or total costs like tuition, fees, room, board?
You subtract tax free scholarships and grants (those that pay for tuition, fees, books) from tuition, fees and books total (QEE) and that gives you adjusted QEE for AOTC.
Loans are not figured into this as FA. And room and board can be paid with 529 money.
But if room and board is paid with scholarships and grants, those become taxable.
I don’t know what the series EE savings bond rules are, can they pay for any education expense and interest is not taxable?
Work study income is W2 income, it also does not reduce QEE, only free money (grants and scholarships).
I read the above chapter in 970 and it seems that the savings bond has to be used for tuition and fees.
The interest rates on our Seties EE bonds purchased in the early 90s are still really good compared to what you can get in a bank. I am considering not cashing mine out after all for education – thise rates hold for a few more years. (Not at my computer, so can’t give the exact amounts).
I just checked. My bonds were purchased in 1992, and I think they are still earning 6% (!). Edit: Nope, 4% (fine print!). But that is still better than I can get in any savings account!
The amounts involved can get complicated here, and it may make sense in some cases to hold onto these bonds - although sometimes holding onto them affects the next year’s financial aid - especially if it was need-based aid.
Usually the student should redeem everything in the student’s name, first, and use up those assets, on tuition and fees. Then, the 529 should be used to pay remaining tuition and fees., and if applicable, some of it towards room and board. Depending on how need based or merit/scholarship was given, the rest comes from parent’s assets, and unless there are restrictions, the parents should make every effort to claim the maximum tax credit - even if it means treating some of the student’s FA as taxable income, since the student is generally taxed at a much lower bracket than the parents.
Sadly, the schools don’t/can’t give tax advice, and this is confusing to most folks especially the first time through.
Think of it as the tax credit is worth more to the parents than to the child, and it will help you start to understand. Many parents pay for their child’s college expenses out of several buckets - and it makes sense to try to understand them before beginning to redeem them - that is advice number 1, because as pointed out above, the tax implications are different for each of them.
Advice number 2 is to keep detailed records on each expense. Not just the form 1098T you will get from the college which identifies the tuition expense, but also all the fees and books, computer purchases, etc.
Series EE bonds are not taxed if used for QEE’s - but that includes tuition and fees, not room and board. But if you are allowed to juggle the scholarship/financial aid and have that apply toward the R&B, then the amount the parent has paid is attributed to QEE’s - and there may still be an amount that the parent paid after the EE bonds and 529 that will allow the parent to claim the full AOTC.
If OP wants to provide a few rough numbers, I am sure folks would offer advice as to which buckets should pay for what expenses (tuition, fees, books/computer, R&B, etc.) to minimize the tax implications and best set you up for next year’s financial aid.
In some situations, it makes sense to pay Fall 2016 and Spring 2017 all before 12/31/16 - and in others, it may make more sense to wait until after 12/31/16 to make the Spring payment.
^ In that case will not be cashing them out any time soon. I think they continue to earn for 30 years?
@mommdc the 45k was all tuition in my scenario, someone commuting to Harvard lets say.
However, I am wondering abut something you said. So if someone ELSE, from another state, as an EFC of 0 and attends Harvard lets say, where they pay 0.And COA is 65k including room and board, of which tuition and books are 45k. Do they pay tax on the 20k room and board? I thought, perhaps incorrectly that it is considered income to the extent a scholarship exceeds your COA?
I thought work study income was treated differently for purposes of W2s as opposed to working in a car wash?
Work study income is reported on a W-2, just like income from working at a car wash (to use your example). Work study income is different in that A) it is not subject to FICA taxes, and B) it is subtracted from student income in the FAFSA EFC calculation.
How much they earn depends on when you bought the bond:
https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eeratesandterms.htm
Read all the FAQs – my bonds were at 6% for the first 12 years, then dropped to 4% until the 30 year mark. So mine will mature in 2022.
It is considered taxable if grants and scholarships exceed QEE, not COA. In your example, @SeekingPam, the room and board is taxable to the student, not the parent.
If the savings bonds are in the student’s name, don’t they have to be listed as a student asset every year and thus assessed at 20% toward the financial aid formula? I’d think it would be best to use them up quickly.
Thank you for the information, a lot to think about and research.