Interest earnings on certain
U.S. savings
bonds purchased in 1990 and later are free of federal income tax
if you use the money to pay for qualified higher education expenses.
And savings bond interest is always free of state and local income
tax.
You don’t have to say that you plan
to use the bonds to pay for college when you buy them, but there
are some restrictions. The bonds must be registered in the name
of one or both of the beneficiary’s parents, and the beneficiary
can’t be an owner or co-owner. The buyer must also be at
least 24 at the time of purchase.
Bumping the ceiling
In addition, there’s a ceiling on how
much your family can be earning at the time you cash in the bonds
in order to qualify for the tax-free benefit. For 2008, you can
deduct all your interest if your
adjusted
gross income (AGI)
is less than $67,200 and a decreasing
percentage until your income exceeds $82,100. If you earn more,
the interest is fully taxable. If you’re married and filing
jointly, you can deduct all your interest if your AGI is less
than $100,650 and some of the interest if your AGI is less than
$130,650.
