Bonds - U.S. Savings Bonds for Education

You can use your U.S. Savings Bonds towards your child's education and exclude all the interest earned from your federal income. This is sometimes known as the Tax Free Interest for Education program. Here are some basics on how the Education Savings Bond program works.

You can exclude all or a portion of the interest earned from savings bonds from your federal income tax. Qualified higher education expenses, incurred by the taxpayer, the taxpayers spouse or the taxpayer's dependent at a institution or State tuition plans (see below) have to incur in the same calendar year the bonds are cashed in.

The following qualifications and exclusions apply.

 •Only Series EE or I Bonds issued in 1990 and later apply; "Older" bonds cannot be exchanged towards newer bonds.
      •When purchasing bonds to be used for education, you do NOT have to
declare that at the time of purchase that will be using them for education purposes.
      •You can choose NOT to use the bonds for education if you so choose at a later date.
      •You must be at least 24 years old when you purchase(d) the bonds.
      •When using bonds for a child's education, register the bonds in your name, NOT the child's name.
      •A child CAN NOT be listed as a CO-OWNER on the bond.
      •The child can be a beneficiary on the bond and the education exclusion can still apply.
      •If you are married, a joint return MUST be filed to qualify for the education exclusion.
      •You are required to report both the principal and the interest from the bonds to pay for qualified expenses
      •Use Form 8815 to exclude interest for college tuition.
Here are a few frequently asked questions.

   Does everyone in every income bracket qualify?
       No. For tax year 2005, the interest exclusion is reduced for single taxpayers with a modified gross income of 61,200, and eliminated completely at incomes of 76,200 and up. For married couples who file jointly, the exclusion is reduced for incomes of 91,850 and eliminated completely at 121,850 and up. These income limitations apply to the year you use the bonds, and NOT when you purchase the bonds.

    What Institutions Qualify for the Exclusion?
         Post secondary institutions, colleges, universities, and various vocational schools. The schools qualify must participate in federally assisted programs (ex. They offer a guaranteed student loan program). Beauty or secretarial schools and proprietary institutions usually do not apply.

      What are Qualified Expenses?
          Tuition and fees, for any course or educational program that involves sports, games or hobbies, lab fees and other required course expenses that relate to an educational degree or certificate-granting program. These expenses must be incurred during the same tax year in which the bonds are cashed in. Note: Room/board expenses, books, and expendable materials (pens, notepads, etc.) do not qualify.
           A bit of advice: when purchasing bonds that you think will be used for educational purposes, purchase them in small denominations. That way you won't have to cash in more bonds than are necessary to pay the current college tuition expenses. Remember, any excess monies you receive from cashing in some savings bonds that EXCEED the tuition bills may create a taxable event when you file your federal tax return. (Savings Bonds are always exempt from State and Local/City taxes.)

Here are some resources on the web that can help.

 The Treasury Department's web site:
      http://www.savingsbonds.gov/sav/savedfaq.htm
      The bond experts at SavingsBonds.com:
      http://www.savingsbonds.com

Bonds - Value of U.S. Treasury Bills

The current value of a U.S. Treasury Bill can be found using the Wall Street Journal. Look in the WSJ in the issue dated the next business day after the valuation date you want, specifically in the "Money and Investing" section under the headline "Treasury Bonds, Notes, and Bills". There you need to look for the column titled "TREASURY BILLS". Scan down the column for the maturity date of your bill. Then examine the "Bid" and "Days to Mat." values. The necessary formula:

Current value = (1 - ("Bid" / 100 * "Days to Mat." / 360)) * Mature Value

For example, a 13-week treasury bill purchased at the auction on Monday June 21 appears in the June 22, 1994 WSJ in boldface as maturing on September 22, 1994 with an "Asked" of 4.18 and 91 "Days to Mat.". Its selling price on Wedesday August 31, 1994 appeared in the September 1, 1994 Wall Street Journal as 20 "Days to Mat." with 4.53 "Bid". A $10,000 bill would sell for:
(1 - 4.53/100 * 20/360) * $10,000 = $ 9,974.83
minus any brokerage fee.

The coupon yield for a U.S. Treasury Bill is listed as "Ask Yld." in the Wall Street Journal under "Treasury Bonds, Notes and Bills". The value is computed using the formula:

couponYield = 365 / (360/discount - daysToMaturity/100)

Discount is listed under the "Asked" column, and "couponYield" is shown under the "Ask Yld." column. For example, the October 21, 1994 WSJ lists Jan 19, '95 bills as having 87 "Days to Mat.", and an "Asked" discount as 4.98. This gives:
365 / (360/4.98 - 87/100) = 5.11%
which is shown under the "Ask Yld." column for the same issue. DaysToMaturity for 13-week, 26-week, and 52-week bills will be 91, 182, and 364, respectively, on the day the bill is issued.

 The New York Federal Reserve offers an article with examples:
      http://www.ny.frb.org/aboutthefed/fedpoint/fed28.html

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