my son cashed savings bonds to pay his college tuition. Does he have to claim the interest on his taxes?

Answer 1

Unfortunately, he will have to claim the interest unless he was filing tax return all along and claiming the yearly interest every year (which most people don't know to do...see below).

You may have heard that interest on US Savings Bonds can be exempt from federal taxes if the proceeds are used to pay for education. This is only true IF the bonds are issued to someone who has already reached the age of 24. Bonds issued to someone younger than 24 will not be exempt from federal taxes under this provision.

Basically, the bonds need to be issued in the name of the child's parent and used for the child's education (or the parent's education for that matter). As long as the child is still the dependent of the parent in whose name the bond is issued, the parent can cash the bond, use it for their dependent's education, and if other things are OK (like the parent's income is below a certain amount), the interest is federal tax exempt.

If the bonds are issued in the name of the child, they will not fall under this provision.

All interest on US Savings bonds is exempt from STATE and LOCAL taxes no matter what.

Sorry for the bad news.

(alternate claiming method)

One can claim the interest on a US Savings Bond in the year the bond is cashed, or they can claim the interest accrued in the year it is earned. This is an all-or-nothing proposition. You must start claiming the interest in the first year you own the bond and keep claiming it every year until it is cashed OR claim all the interest in the year it is cashed. You can't do some of each.

Why is claiming the interest each year more beneficial?

If the interest is less than $800, and the person who makes the interest has no other income (like a child, for example), even though they MUST file a tax return each year, the tax due is zero. That's right, the first $800 of unearned income is federal tax exempt. Starting in 2006, that amount increases to $850. Therefore, if you have a child who owns US Savings Bonds, it may be better to file a tax return for them every year and claim the interest so that when the bond is eventually cashed, the amount of interest they must claim will be much less. It can be a slight pain-in-the-butt figuring out how much interest the bond earned each year and then filing a tax return for the child, but it can be well worth the effort. There are web sites that calculate the interest a bond earns in a specific year.

Answer 2

Probably. There is an exemption from tax in some cases on EE and I series bonds, but the rules are hard to meet. See "Educational Savings Bond Program" in chapter 7 of IRS publication 17 - I'm sure the same info is in other publications also.

Answer 3

If they matured in 2005, that was the year. To file: In 2008, you list the interest on 1040 schedule B, then subtotal, then subtract out with a notation that the interest is reported on 2005. For 2005, you amend and pay the tax. The IRS will bill you for the interest since 4/15/2006. You probably won't be asked to pay a penalty.

Answer 4

Maybe

It depends on what series they are. There is an exclusion available for Series E and EE I believe.

Also, if you exclude the interest from income, you can not take the education credits or deduction for the same tuition.

Answer 5

Yes, he does. That is the downside of savings bonds. I learned the hard way when I cashed in THOUSANDS of dollars worth. No fun at tax time!