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taxmap/pubs/p970-045.htm#TXMP5762e6c8 Figuring the Tax-Free Amount(p56)

If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free.

To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. The denominator (bottom part) of the fraction is the total proceeds you received during the year.

taxmap/pubs/p970-045.htm#TXMP4ccd2302
Example.(p56)

In February 2007, Mark and Joan Washington, a married couple, cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. In 2007, they paid $7,650 of their daughter's college tuition. They are not claiming a Hope or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Their MAGI for 2007 was $80,000.

$3,000 interest

×

$7,650 AQEE $9,000 proceeds

=

$2,550 tax-free interest

They can exclude $2,550 of interest in 2007. They must pay tax on the remaining $450 ($3,000 − $2,550) interest.

taxmap/pubs/p970-045.htm#TXMP550a3004 Effect of the Amount of Your Income on the Amount of Your Exclusion(p56)

Effect of the Amount of Your Income on the Amount of Your Exclusion

The amount of your interest exclusion is gradually reduced (phased out) if your modified adjusted gross income is between $65,600 and $80,600 (between $98,400 and $128,400 if your filing status is married filing jointly or qualifying widow(er)). You cannot exclude any of the interest if your modified adjusted gross income is equal to or more than the upper limit.

The phaseout, if any, is figured for you when you fill out Form 8815.

Previous Page:  Publication 970 - Tax Benefits for Education - Education Savings Bond Program Next Page:  Publication 970 - Tax Benefits for Education - Claiming the Exclusion Use   to find additional occurrences of topic items.