<p>My child is a rising senior and I am just starting to seriously think about college financial aid. I have a large number of US Savings Bonds. I have some questions about the best way to deal with them. Any help would be appreciated.</p>
<p>**Bonds in my child's name.......Should she cash them in this summer? She doesn't have any other income. Will she have to pay income tax on the interest? Will I have to report them on the FAFSA that I will complete next January? Is it better to get rid of them before 2010?</p>
<p>**Bonds in my name or my husband's name.......If I cash some in this year, the interest will increase my AGI . Most of the bonds were purchased in the program "Tax Free for Education." How do you report them on the FAFSA? What would have the least effect on my EFC?</p>
<p>(I already know the current value of the bonds using the Savings Bond Wizard.)</p>
<p>I wouldn’t cash any savings bonds in this summer. The interest you are earning on the bonds (especially the older ones) is likely much higher than what you’ll get from any other near-liquid investment like a savings account or CD. Wait until you need the money to cash them.</p>
<p>The interest earned on the bonds is reported as income, not the entire cash value of the bond itself, but she may not have to pay tax on any of it. If she has no earned income (ex. wages), then she can claim a $900 standard deduction I believe. So she would have to have more than $900 of interest income from the bonds before she begins to pay tax (on the amount over $900).</p>
<p>Not everyone qualifies for the Tax Free for Education exemption. If you do, you must have education expenses in that tax year. So if you cash bonds this year and your daughter is still in high school, you will still have to pay tax on the interest since she does not yet have any education expenses.</p>
<p>I don’t remember if the FAFSA has any line for savings bonds that are uncashed. Even if it does, there’s really no reason to list them (and have a higher EFC). The interest affects your AGI anyway which goes on the FAFSA.</p>
<p>“Even if it does, there’s really no reason to list them”??? Really? Wow!</p>
<p>You are required to report them as an asset asset on FAFSA. Not doing so is illegal. Lieing on FAFSA can lead to unpleasant consequences including having to repay all financial aid and heavy fines.</p>
<p>Reporting a savings bond as an asset is equivalent to reporting the total value of spare cash you might have stored in an envelope. Most people probably wouldn’t add up every dollar in cash on hand to file their FAFSA. It really depends on the person and whether the amount in bonds they have is enough to mention on their FAFSA.</p>
<p>From what the OP has indicated, the bonds in question are not the equivalent of spare change. Whether it’s a $200 or $10,000 it does need to be reported. It’s kind of like saying I don’t need to report the tens of thousands of dollars I have stuffed in my mattress because I don’t want to count it.</p>
<p>I know that any bonds that I have when I complete the 2010 FAFSA must be listed as assets. If my child or I cash them in during 2009, how will they affect my EFC? I know the interest on my bonds would increase my AGI, however what about the interest on my child’s bonds? (As I mentioned, she has no income and has never filed taxes.)</p>
<p>Your child’s AGI will be the total amount of interest income earned by the bonds. She would have to report that amount on her FAFSA. Her taxable income would be her AGI minus the standard deduction for no earned income, which I believe is $900 for the 2008 tax year. If her taxable income is zero she most probably does not have to file.</p>
<p>You’d be reporting the basis of the bonds on your FAFSA whether you cash them in or not. The only line that would change is your interest income and your AGI. Your EFC shouldn’t change <em>that</em> much but it really depends on the amount of bonds you have. I’d run an EFC calculator to see how much it would change. If you choose not to cash them, the interest earned (to date) on the bonds should not be reported as an asset because the interest isn’t realized until the day the bonds are cashed.</p>
<p>Your bonds can be used tax free for education expenses but only in the year the expenses are incurred, for specific expenses, and if you meet income restrictions. The relevant IRS rules are found here (2008 tax year - 2009 is not out yet)
<a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a>
page 60
So for your bonds you *may *be better off hanging on to them and selling them in the year you are paying the expenses. And of course, unless you are planning to spend the proceeds or are able to put them into a protected asset (such as your home) they will still be reportable if they are in your bank account. Although they must be reported as assets you do have some asset protection based on the number of parents and the age of the older parent. For instance a 2 parent family where the older parent is 50 has asset protection of @ $55,000. If your assets are less than that then the bonds will have no impact on the EFC. Assets over the protected amounts affect the EFC by 5.6%. Parent income has a much larger affect on the EFC than parent assets - up to 47% for incomes not so very high. </p>
<p>Students have no asset protection. Their assets affect the FAFSA EFC by 20%. They do have some income protection. For the current FAFSA (2009-2010) the student income protection is around $3800. If the income portion (interest) realized by selling the bonds is below that then, if she has no other income, the interest will not affect her EFC. Again, if the bonds are sold but the money is still in the bank it will still be reportable on FAFSA (investments and savings/bank accounts are treated the same by the EFC formula) and will have no protection.But if there are expenses you know will be coming up (computer for college etc) then have her buy them before filing FAFSA. As far as tax filing for a dependent is concerned the threshold for having to file is much lower for unearned income than for earned income ($900 for 2008). Bonds held by the student are not eligible for the education tax breaks (which seems very odd to me).</p>
<p>All the info re asset protection is for FAFSA and the FAFSA EFC only. If you are looking at schools that require CSSprofile then they have different requirements and rules.</p>
<p>For all assets you have to calculate the value as of the day you are completing FAFSA. For savings bonds you must report the current value of the savings bond including interest earned to date.</p>
<p>^ Unless there is a specific rule on this, you shouldn’t have to report the current value of the bonds, just the basis. For all tax purposes the interest is unrealized until the bonds are actually sold. This is why you pay tax on the interest when the bond is cashed, not on a yearly basis.</p>
<p>UHS, for FAFSA assets are always reported at NAV (market value less outstanding debt). Tax treatment is not considered. The rules about asset valuation are very clearly laid out in the FAFSA instructions.</p>
<p>UHSdebater: the value of the bonds does have to be reported because the bonds are an investment. It is the same as the funds in a brokerage account; it is the value of the account not the basis in the account that is reported. I don’t know if the tax code has changed in recent years, but when we first started accummulating savings bonds, we had the option of either reporting the interest earned every year or reporting it in the year a bond was cashed. The requirement was that the taxpayer be consistent with whatever method he/she used.</p>