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Income limits for exclusion reduction increased. For 2008, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your MAGI is between $100,650 and $130,650. You cannot exclude any of the interest if your MAGI is $130,650 or more. For 2007, the limits that applied to you were $98,400 and $128,400.For all other filing statuses, your interest exclusion is phased out if your MAGI is between $67,100 and $82,100. You cannot exclude any of the interest if your MAGI is $82,100 or more. For 2007, the limits that applied to you were $65,600 and $80,600. See Effect of the Amount of Your Income on the Amount of Your Exclusion , later.
Generally, you must pay tax on the interest earned on U.S. savings bonds. If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds.
However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income.
You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions.
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You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.
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Your modified adjusted gross income (MAGI) is less than $82,100 ($130,650 if married filing jointly or qualifying widow(er)).
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Your filing status is not married filing separately.
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Tuition and fees required to enroll at or attend an eligible educational institution. Qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.
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Contributions to a qualified tuition program (QTP) (see chapter 8).
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Contributions to a Coverdell education savings account (ESA) (see chapter 7).
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Tax-free part of scholarships and fellowships (see chapter 1).
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Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see chapter 7).
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Expenses used to figure the tax-free portion of distributions from a QTP (see chapter 8).
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Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as:
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Veterans' educational assistance benefits (see chapter 1),
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Qualified tuition reductions (see chapter 1), or
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Employer-provided educational assistance (see chapter 11).
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Any expenses used in figuring the Hope and lifetime learning credits (see chapters 2 and 3).
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Foreign earned income exclusion,
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Foreign housing exclusion,
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Foreign housing deduction,
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Exclusion of income for bona fide residents of American Samoa,
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Exclusion of income for bona fide residents of Puerto Rico,
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Exclusion for adoption benefits received under an employer's adoption assistance program,
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Deduction for student loan interest,
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Deduction for tuition and fees, and
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Deduction for domestic production activities.
If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free.
To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. The denominator (bottom part) of the fraction is the total proceeds you received during the year.
Example.
In February 2008, Mark and Joan Washington, a married couple, cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. In 2008, they paid $7,650 of their daughter's college tuition. They are not claiming a Hope or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Their MAGI for 2008 was $80,000.
$3,000 interest |
× | $7,650 AQEE $9,000 proceeds |
= | $2,550 tax-free interest |
They can exclude $2,550 of interest in 2008. They must pay tax on the remaining $450 ($3,000 − $2,550) interest.
The amount of your interest exclusion is gradually reduced (phased out) if your modified adjusted gross income is between $67,100 and $82,100 (between $100,650 and $130,650 if your filing status is married filing jointly or qualifying widow(er)). You cannot exclude any of the interest if your modified adjusted gross income is equal to or more than the upper limit.
The phaseout, if any, is figured for you when you fill out Form 8815.
Use Form 8815 to figure your education savings bond interest exclusion. Enter your exclusion on line 3 of Schedule B (Form 1040), Interest and Ordinary Dividends, or Schedule 1 (Form 1040A), Interest and Ordinary Dividends for Form 1040A Filers. Attach Form 8815 to your tax return.
The information is the same as in the above example for Mark and Joan Washington, except they have a modified adjusted gross income of $114,450. In this example, they can exclude $1,377 (line 14 of Form 8815 shown on the next page) of interest in 2008.
They must pay tax on the remaining $1,623 interest ($3,000 total interest – $1,377 excluded interest).
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