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Savings Bonds for EducationMany 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 education expenses. The deferred interest is excluded from income when the bond owner pays qualified higher education expenses at an eligible institution or State tuition plan in the same calendar year that the bonds are redeemed. To qualify, the bond owner must have purchased bonds issued after 1989 and 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. The bonds must be in the name of a parent to qualify. If the student is a dependent and below the age of 24 when the bonds are bought, other individuals, such as grandparents, other relatives, or friends, can participate in the program and buy bonds for minor children by registering 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 be asking why aren't the benefits available if the grandparents purchase the bonds? The benefits are only available to the purchaser of the bonds or a dependent. This essentially cuts out many grandparents from receiving these benefits. A full exclusion is also available only if the individual's income (which must include the interest earned on redeemed savings bonds) is under certain limits in the year the bonds are redeemed. For single taxpayers in the year 2001, the tax exclusion begins to be reduced with $55,750 modified adjusted gross income and is eliminated for adjusted gross incomes of $70,750 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $83,650 modified adjusted gross income and is eliminated for adjusted gross incomes of $113,650 and above. Married couples must file jointly to be eligible for the exclusion. 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 only tuition and fees are covered while room, board, and books aren't qualified educational expenses under this program. If you are interested in this savings plan, you should first discuss the strategy with your Financial Advisor. It is critical that you understand the limitations of the plan and do not make any mistakes that could disqualify you from the exclusion. Your Financial Advisor can also point out other savings vehicles that may be more beneficial given your goal, time horizon and risk tolerance. NOTE:
ALL information contained in this site is for illustration purposes only, and by NO means should be considered individual tax or legal advice under any circumstances whatsoever!
Lynn R. Siewert AIMC
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