xPost: Does anyone have an experience with EE Bonds?

[FourOaks]

I am looking for someone who may have experience/knowledge regarding the government EE series savings bonds. When these bonds come "due" what can be done with them? We are specifically trying to figure out if there is a way to use them for educational expenses (like dual enrollment class tuition) without having to pay tax.

 

Does anyone know anything about this, or happen to know who would be the best type of person to speak with about this?

 

Thanks MUCH!!!

(posting on College Board also)

[RootAnn]

Check out these links for information:

Spells out the rules pretty clearly.

 

Adds income requirement limits link

 

A lot more information at this link - but in paragraph form & very wordy.

[Julie in MN]

I had bonds that accumulated during my 17 years working for the VA. A couple of years ago, I used the remainder of them to pay towards a student loan for our oldest son.

 

It doesn't matter whether the bonds have reached their "due date" or whether you bought them yesterday. The thing is that when you cash them in, you get a little interest. (The "face value" is really meaningless, and must have been some kind of selling point. You get interest according to the laws each year.) That interest is taxable income, just like any other interest. But in this case, the tax on that income will be waived if you use it towards ed. expenses.

 

There are some weird rules & details, like the bonds can't be in your child's name, and you have to be married or something, and of course you can't have received scholarships or tax credits to cover those educational expenses. You'll need to read through the IRS form instructions.

 

But basically, it's just a matter of filling out an extra form at tax time. If you're paying someone like HR Block, you'll probably have to pay for them to do the extra form. If you're using an online service like TaxAct, it will just be part of the Q&A that you don't want to skip over.

 

It was a few years ago for us, so things could have changed, but it wasn't a problem when we did it.

Julie

P.S. I have no idea about high schoolers taking college courses -- I'd read the IRS instructions carefully, 'cause you don't want to get audited!

Edited August 18, 2011 by Julie in MN

[FourOaks]

Thanks for this info ladies. It was a big help. Unfortunately from what I am reading, it seems that tuition for dual enrollment would not qualify for the tax exemption.

 

If anyone knows differently, please fill me in!

 

Thanks.

[Lori D.]

I am looking at this and this for my information. As long as the classes are at a post-secondary institution, AND the classes are part of what is required for a degree program, it looks like you can use them (for example, Writing 101 is probably required for ANY degree, so that could be taken for dual enrollment AND be paid for by the bond, as long as the class is at a school that qualifies for the bond program.)

 

One thing to note: be SURE to look up EVERY individual bond, and see the interest rate on it; use the lowest rate FIRST. The bonds continue to accrue interest for up to 30 years, so if you have a bond that is accruing 4% interest -- SAVE it! Let it keep earning you money, and use bonds that are accruing less than 2% interest first. The bonds "mature" at 30 years, so at that point they will earn no more interest -- but you also don't LOSE any of the accrued interest, either.

 

Check out this website for entering your bonds to track the interest rate on each, and the amount of interest accrued on each, to help you decide which bonds to cash in first. (Here is a list of bonds that have matured and have stopped earning interest.)

 

 

BEST of luck! Warmly, Lori D.

Edited August 18, 2011 by Lori D.

[FourOaks]

Lori,

 

I have a couple of questions for you since you are in the midst of this. First, how do I know whether a bond has a beneficiary or a co-owner?

 

I have a few relatives who would give bonds to my kids as birthday gifts and the like since they were born. For my oldest, that means many of her bonds are almost 14 yrs old. On the bond it will say To: my dd's name and then our address, then below the scan lines (can't remember the term for those) it says, or "my name." This is an EE series bond.

 

So who "owns" this bond? Who is a "beneficiary" and who is a "co-owner"?

 

Also, have you actually paid for a dual enrollment course using the money from a bond and subsequently filed taxes yet or are you just now in that beginning process?

 

The website you posted for finding out how much the bonds are currently worth appears to be down now, so I'll check again later.

 

Thanks for your help!

[FourOaks]

Lori,

 

On my bond it is my daughter's SSN that is listed. No other SSN is listed, just my name. I am assuming this makes a big difference.

 

Thanks,

Angie

[Lori D.]

Also, have you actually paid for a dual enrollment course using the money from a bond and subsequently filed taxes yet or are you just now in that beginning process?

 

 

Alas, just now in the beginning process, so our first outing with the IRS will be in the coming year, so no help for you there...

 

 

 

The website you posted for finding out how much the bonds are currently worth appears to be down

 

 

Maybe try this website instead for an interest calculator.

 

 

First, how do I know whether a bond has a beneficiary or a co-owner?

 

 

NOT an expert here -- I'd take the bonds to a tax accountant who works with these bonds and get the REAL scoop on this -- BUT, my understanding from this pdf file is that the name on the bond is the owner, and the beneficiary would be whoever the owner names. (Note: an owner or co-owner has to have been 24yo at the time of the bond being issued, so you can't have siblings with bonds in their own names claiming each other as beneficiaries...) (Also note: the beneficiary must be a relative -- and in other reading, it seems to me that I saw the beneficiary isn't just any relative, but a dependent under the age of 30, and that comes into play if you still have bonds and a child turns 30, and you want to re-name a different child to still receive the educational tax exclusion benefit...)

 

 

 

I have a few relatives who would give bonds to my kids as birthday gifts and the like since they were born. On the bond it will say To: my dd's name and then our address, then below the scan lines (can't remember the term for those) it says, or "my name." This is an EE series bond. So who "owns" this bond? Who is a "beneficiary" and who is a "co-owner"?

 

 

We have a bond like this for each of our DSs, too. Read through that pdf file -- from the way it reads (and there are links to specific IRS publications), it sounds like those EE bonds that are only in the child's name are owned by the child, with no named beneficiary -- and so are NOT eligible for the educational tax exclusion rule. That is the downside -- once cashed, taxes MUST be paid on the interest accrued. (Further down in that pdf file, it says that if the child is under 18 when the bond is cashed, the interest earned on the bond is taxed at the parent's income rate; if the child is over 18, then the child is responsible to pay the tax at their own (now adult) income rate.)

 

However: I think there is also an "up" side to this, if my reading of the rules is correct -- that since the educational tax exclusion rule doesn't apply, then there are also no educational *restrictions* on those bonds in the child's name. In other words, you can have your child cash the bond (it is in the child's name, so the child is the owner), claim the interest as income on YOUR family income tax form at the parents' tax rate, and then spend the money on *whatever* you want, with no educational restrictions. However: realize that you MUST pay tax on the interest earned -- and the amount of the tax may virtually wipe out any benefit of the interest.

 

 

Now, if you WANT the educational tax exclusion, read further down in that pdf file, and it sounds like the purchaser of the bond can fill out a specific form, which would change the name (ownership) on the bond from the child's name to the purchaser's name, and then, as long as YOU follow the rules about how the money can be spent (i.e., recognized, post-secondary institution, for tuition and fees only, for classes that count towards a degree, etc.) THEN, the money from the cashed bond would be exempt from taxation. Again, be sure to check with someone who really "knows" this stuff -- my understanding is that in order for the educational tax-exclusion to count, a beneficiary has to be a relative -- and may have to be a dependent relative under the age of 30.

 

 

If you go the educational tax-exclusion route, make SURE to keep all receipts and documentation that will help you prove on your IRS tax return that the money from the bond was indeed spent exactly as it was allowed to be spent to keep it tax-free.

 

 

At least, that's how I read all this fine print. :tongue_smilie: Warmest regards, Lori D.

Edited August 19, 2011 by Lori D.

[mom31257]

My dd just cashed in 2 very small ones at the bank, but they said nothing to us about taxes.

[Photo Ninja]

The bank probably won't tell you anything about paying taxes. The bank sends the IRS and the owner of the bond a form to use when filling out your taxes. It states the exact amount of the money received from cashing in the EE bonds. I can't remember the form number, but each of my dc received one in the mail in January, I think, and they used it when filling out their taxes and were taxed on the interest. Fortunately, they don't make much money at their jobs, so there was not much tax to be paid, but they still had to claim the amount as income on their taxes. Since the bonds were in our dc's names they couldn't get the education credit, but when the bonds were purchased, there was no education tax free interest to be concerned about. At the time we bought the bonds we thought it was better to have the bonds in our dc's names and have interest taxed at our dc's tax rate than at dh and my higher tax rate. But the bank will complete the form and send it to the your dc and the IRS with the info so your dc (if the bonds are in your dc's name) will be claiming the income on their taxes.

[Julie in MN]

The bank probably won't tell you anything about paying taxes. The bank sends the IRS and the owner of the bond a form to use when filling out your taxes. It states the exact amount of the money received from cashing in the EE bonds. I can't remember the form number, but each of my dc received one in the mail in January, I think, and they used it when filling out their taxes and were taxed on the interest. Fortunately, they don't make much money at their jobs, so there was not much tax to be paid, but they still had to claim the amount as income on their taxes. Since the bonds were in our dc's names they couldn't get the education credit, but when the bonds were purchased, there was no education tax free interest to be concerned about. At the time we bought the bonds we thought it was better to have the bonds in our dc's names and have interest taxed at our dc's tax rate than at dh and my higher tax rate. But the bank will complete the form and send it to the your dc and the IRS with the info so your dc (if the bonds are in your dc's name) will be claiming the income on their taxes.

 

It seems like there would be no benefit in using the credit towards college unless you had to pay tax on the interest. So if the kids aren't really taxed on that income, then I'd just leave things as is.

 

However, I thought I read something that in the case if minor children, the interest must be taxed on the *parents'* 1040? That is when it would help to move them over to the parents and allow the parents to use the money towards college and thus not pay tax on it.

 

Julie