What is a Qualified Savings Bond
A qualified savings bond refers to a series EE and I savings bond which has been issued after December 1989 and purchased by an individual at least 24 years old.
BREAKING DOWN Qualified Savings Bond
A qualified savings bond has tax-free interest if you redeem it to pay for a higher education expense. As TreasuryDirect, a division of the U.S. Department of the Treasury Bureau of the Fiscal Service, explains, "The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989, when the bond owner pays qualified higher education expenses at an eligible institution."
Beyond those basic requirements, the federal government also requires that qualified expenses for higher ed be incurred the same tax year during which the qualified savings bonds are redeemed, and the buyer must be at least 24 years of age on the first day of the month in with the bonds are purchased.
In addition, bonds purchased for a child's education must be registered in the buyer's name and/or their spouse's; children can be listed as beneficiaries on the bond, but not as a co-owners, according to the Treasury Department. Bonds to finance a personal education have to be registered in that person's name, and married couples must file a joint tax return to qualify for the exclusion.
There are also income requirements for the purchaser, which are outlined on IRS Form 8815, and specifications that post-secondary institutions must meet to qualify for the bonds.
What Expenses are Covered by Qualified Savings Bonds?
According to TreasuryDirect, qualified educational expenses include tuition and fees (lab fees, for example or other add-on course expenses). In addition the bonds can cover "any expenses that benefit you, your spouse, or a dependent for whom you claim an exemption; expenses paid for any course required as part of a degree or certificate-granting program; expenses paid for sports, games, or hobbies qualify only if part of a degree or certificate program."
The Treasure specifies a few major expenses that aren't covered by qualified savings bonds: books, room and board.
It also notes that, "the amount of qualified expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other forms of tuition reduction." In addition, "you must use both the principal and interest from the bonds to pay qualified expenses to exclude the interest from your gross income. If the amount of eligible bonds you've cashed during the year exceeds the amount of qualified educational expenses paid during the year, the amount of excludable interest is reduced pro rata."