Form 8815 – Exclusion of Interest from Series EE and I U.S. Savings Bonds (noted earlier for education purposes)

Understanding Form 8815: Your Guide to Tax-Free Savings Bond Interest

Saving for college can be tough. Luckily, there are tax benefits that can help, and one of them involves U.S. savings bonds. If you’ve purchased Series EE or Series I savings bonds and are using them to pay for education, Form 8815 could be your ticket to some tax savings. Let’s dive into how this all works.

What Are Series EE and Series I Bonds?

Before we get into Form 8815, let’s talk about the types of bonds we are focusing on. Series EE and Series I bonds are savings bonds issued by the U.S. Treasury. They are considered a safe way to save, and they earn interest over time.

• Series EE Bonds: These bonds earn a fixed interest rate set at the time of purchase.
• Series I Bonds: These bonds earn a rate that combines a fixed rate with an inflation rate, making them a good option for protecting your savings against inflation.

These bonds used to be sold at brick-and-mortar banks but are now primarily purchased electronically through TreasuryDirect.

How Does Form 8815 Work?

Form 8815 allows you to exclude some or all of the interest you’ve earned on eligible Series EE and Series I savings bonds from your income when you use that money to pay for qualified educational expenses. This means you don’t have to pay federal income tax on that interest. It’s like getting a little tax break for saving for education.

Here’s the basic idea:

1. You buy Series EE or I bonds. You must be at least 24 years old when you purchase them.
2. You redeem the bonds. You cash out the bonds, collecting both the original amount you paid and the interest it has earned.
3. You use the money for qualified education. You use the proceeds from the bonds for tuition, fees, and other qualifying higher education expenses at an eligible educational institution.
4. You fill out Form 8815. You use this form to determine the amount of interest you can exclude from your income.
5. You file your taxes. You submit Form 8815 with your federal income tax return and reduce your taxable income.

Who is Eligible to Use Form 8815?

Not everyone can use Form 8815. There are specific rules to qualify for this tax exclusion. Here’s a breakdown:

• Age Requirement: You must be at least 24 years old when you purchased the bonds.
• Ownership: The bonds must be registered in your name (the taxpayer) or your spouse’s name. The bonds cannot be owned by your child if you are trying to use them to reduce your taxable income.
• Dependent Status: If you or your spouse are claimed as a dependent on someone else’s tax return, you can’t claim this exclusion.
• Filing Status: You must have one of the following filing statuses: single, head of household, qualifying widow(er), or married filing jointly. If you file as married filing separately, you cannot claim the exclusion.
• Modified Adjusted Gross Income (MAGI): Your MAGI must be below certain thresholds. These thresholds can change every year and depend on your filing status. Generally, the exclusion starts to phase out for higher income individuals and is completely unavailable to those whose income exceeds the phaseout limit. The phaseout limits for 2023 were $145,200 for married couples filing jointly and $96,800 for all other filers.

Important Note: The student doesn’t have to be your child; you can use the savings bond interest exclusion for qualified expenses paid for you, your spouse, or your dependent.

What are “Qualified Education Expenses”?

The funds need to be used for what the IRS calls “qualified higher education expenses.” This generally includes:

• Tuition and fees required for enrollment or attendance at an eligible educational institution. This includes accredited colleges, universities, vocational schools, and other postsecondary institutions.
• Expenses for a Special Needs Student: Expenses for special needs services needed by a special needs student to attend an eligible educational institution.
• Expenses do NOT include room and board, books, supplies, transportation, or student loan repayments.

How to Calculate the Interest Exclusion on Form 8815

The amount of interest you can exclude depends on the amount you spent on qualified education expenses. Here’s a simplified view of how you determine the exclusion:

1. Determine how much of the bond proceeds were used for qualified educational expenses.
2. Figure out your modified adjusted gross income (MAGI). This number is very important, as it is used to determine how much of your interest income you can exclude.
3. Compare your expenses against the total amount of bond proceeds. If your total qualified expenses are less than the bond proceeds (both the original cost and interest), you may not be able to exclude all interest.
4. The calculation is all laid out on form 8815; make sure to follow the instructions for this form precisely to calculate your exclusion.

Keep good records. You’ll need documentation to prove that you used the money for qualified education expenses. This might include receipts from the educational institution.

The Importance of the Modified Adjusted Gross Income (MAGI)

The amount of interest you can exclude is affected by your MAGI. Higher-income taxpayers see the exclusion reduced and eventually eliminated. It is critical to check current income limits since these change from year to year.

• Phaseout Limits: If your MAGI is within the phaseout range, you might be able to exclude only a portion of the interest. The exclusion phases out proportionally as your income increases, until it is eliminated completely when it exceeds the maximum.
• Income Limits: If your MAGI exceeds the upper limits, you are not eligible to use Form 8815, and you will be taxed on all the interest you have earned.

When to Consider Using Form 8815

Form 8815 is most helpful if:

• You bought bonds specifically for education. If you planned ahead to save for college by buying Series EE and I bonds, you’re likely a prime candidate for this exclusion.
• You are within the income limits. This is the most important consideration! Be sure your income falls below the threshold to qualify for at least a partial exclusion.
• You are paying for qualified education expenses. Make sure you are spending the money on allowed expenses to get the best tax benefit.
• You have a good idea of your income. Accurately calculating your MAGI before you cash the bonds will help you determine how much of the interest will be tax-free.

Common Mistakes and Misconceptions

• Thinking anyone can use the exclusion. Only those who meet specific age, ownership, filing, and income requirements can claim it.
• Using bonds owned by the child. The bonds must be registered in the parent’s name (or other adult) to qualify.
• Including non-qualifying expenses. Remember, room and board, books, and student loan payments don’t count.
• Ignoring income limits. Your MAGI can determine whether or not you can take the exclusion.
• Failing to keep records: The IRS may ask for proof that you used the funds for eligible expenses, so keep all relevant documents.

Related Tax Concepts

Understanding Form 8815 also helps when you’re thinking about other education-related tax benefits:

• 529 Plans: These are tax-advantaged savings plans for education. While the contributions are not deductible at the federal level, earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses.
• American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC): These are tax credits for qualified education expenses. Unlike a deduction (which simply lowers your taxable income), a credit directly lowers the amount of tax you owe.
• Education Savings Accounts (ESAs): Also called Coverdell ESAs, these savings accounts offer tax-advantaged ways to save for education.
• Taxable Interest: Interest income that is not excluded by Form 8815.

Tips for Maximizing Your Savings

1. Plan Ahead: If you know you’ll have education expenses, consider purchasing bonds strategically to take advantage of this exclusion.
2. Keep Good Records: Retain all purchase and redemption paperwork for your bonds and the documentation showing you paid for qualified educational expenses.
3. Estimate your income. Check the limits every year, and have a good idea of your income before cashing the bonds.
4. Consult a professional. If your financial situation is complex, a tax professional can help you make the most of these tax savings.

In Conclusion, Form 8815 can be a powerful tool for parents, students, or anyone saving for education. By understanding the rules and requirements, you can potentially reduce your tax burden and make education more affordable. Just remember to stay informed and plan ahead to take full advantage of the tax savings you deserve.