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Raymond James A column by James Kruzan


Savings Bonds for Education



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August 25, 2010 - By James B. Kruzan, CFP

Many individuals save for their children's education by participating in the U.S. Government's Education Bond Program. The benefit many see with saving in this program is their investments in savings bonds (Series EE and I bonds) grow tax deferred. The program also provides a savings bond tax exclusion that permits individuals to exclude from their income all or a portion of the interest earned (that has been growing tax deferred) when the bonds are redeemed and used for the payment of qualified higher education expenses.

The interest is tax-free when the bond owner pays qualified higher education expenses at an eligible institution. To qualify, the bond owner must have purchased bonds issued after 1989 and has to have been at least 24 years old by the first day of the month in which the bonds were bought. This effectively eliminates the benefits of the education tax exclusion for bonds purchased in the name of a minor child. Typically, the bonds are in one or both parents' names.

When bonds are bought by other individuals such as grandparents, other relatives or friends, the buyer will want register the bonds in the parents' names. In this case, the tax exclusion isn't available to the buyer but may be available to the parents if the other limitations are met. You may wonder why the exclusion is not available if the grandparents purchase the bonds. The exclusion is only available to the person who claims the student as a dependent on their tax return and that person is typically a parent. This rule eliminates most grandparents from receiving the exclusion benefit.

In addition, the exclusion is available only if the bond owner's income (which must include the interest earned on redeemed savings bonds) is under certain limits in the year the bonds are redeemed. In 2009, the interest exclusion benefits was phase out for joint filers with a modified adjusted gross income (MAGI) between $105,100 and $135,100 ($70,100 and $85,100 for single filers) by a decreasing percentage above the threshold income level. Married individuals filing separately cannot receive the exclusion regardless of income.

If the value of bonds redeemed exceeds the amount of eligible expenses paid, only a proportional amount of interest income may be excluded. Keep in mind that qualified higher education expenses include tuition and fees for the bond owner, the bond owner's spouse, or dependent. It also includes contributions made to a qualified tuition program (QTP) or Coverdell education savings account (ESA).

If you are interested in this savings program, you should first discuss the strategy with your Financial Advisor. It is critical that you understand the limitations of the program and do not make any mistakes that could disqualify you from the exclusion.

James B. Kruzan, CFPâ is a Registered Principal and Branch Manager for Raymond James Financial Services, Inc., Fenton and Clarkston.

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