Academic journal article
By Fiore, Nicholas
Journal of Accountancy , Vol. 182, No. 5
One of the biggest problems facing many parents today is trying to figure out how to pay for their children's education. The rising costs of college education may impose significant burdens on many families; finding ways to finance these expenses may require extensive thought and planning.
In 1988, Congress enacted Internal Revenue Code section 135, which excludes from income the interest from series EE U.S. savings bonds if the proceeds from their redemption are used for specific higher education expenses.
Qualified bonds include those issued after 1989 at a discount to taxpayers who are at least 24 years old before the date of issuance.
A qualified bond purchaser may designate anyone as the beneficiary; however, the interest exclusion is not available if the bonds are bought from another taxpayer (other than a spouse) or are put into the name of a child or other dependent. In addition, the interest is not excludable if the bonds are purchased with redemption proceeds rolled over from series E bonds.
Income limits. A taxpayer must meet certain income limits to exclude the interest; as income increases, the accrued interest otherwise excludable is reduced. Prior to the Small Business Job Protection Act of 1996, which requires different inflation calculations, taxpayers filing jointly for 1996 with modified adjusted gross income of $65,250 or less ($43,500 or less for single taxpayers) could exclude the full amount of qualified interest. When the 1996 income level reached $95,250 for taxpayers filing jointly ($58,500 for single taxpayers), the taxpayer was no longer entitled to any interest exclusion.
The exclusion is not available at all to married taxpayers filing separately; excludable interest also is limited by the qualified higher education costs paid in the tax year. Such costs include tuition and fees for enrollment and attendance at an eligible educational institution; room, board, books and supplies are not included. Eligible institutions include most public and nonprofit higher education and postsecondary education institutions (including many vocational schools and junior colleges). Programs that qualify include nursing, two-year degree programs, one-year programs that prepare students for employment and meet certain criteria, technical institutes and vocational programs. …