US Savings bond interest is tax FREE when used to pay for higher education, but ONLY when certain rules are followed. Know these rules and following them can keep more money in your pocket!
Savings bonds may be used for education and the interest is tax FREE only if the bond is owned by the parent. The student can be the beneficiary, but NOT co-owner or owner.
Also, Prepaid Tuition programs can be paid for tax free using the bonds!
The rules on children’s income – the first $950 of interest is tax FREE, the second $950 is taxed at 10%, anything above that ($1900) is taxed at the parents tax rate.
So, if you have Educational savings bond in your children’s name and wish to use them for their college education, it may be best to cash them in (up to $950 per year) and repurchase the savings bonds in the parents name and place the student as the beneficiary.