Basics of I Bonds
The I Series Savings Bonds offered by the U.S. Department of the Treasury are a way for consumers to invest in low-risk securities. I Series Savings Bonds also come with several tax benefits not available for most other fixed investments.
I Series Savings Bonds for Education Expenses
You will not pay any income tax on the interest earned from I Series Savings Bonds if you use it to pay for qualified education expenses and meet the income limits. Qualified education expenses include tuition and fees, such as required lab courses, at a university or college. It also includes expenses paid for any course required as part of an academic degree program or certificate grant program. The expenses must be incurred on behalf of yourself, your spouse, or a dependent you claim as an exemption on your tax return.
Conditions for I Series Savings Bonds Tax Exemption
You must meet certain criteria to avoid paying taxes on your I Series Savings Bonds. The I Bonds must have been purchased after 1989. You must pay for qualified education expenses in the same tax year that you earn profits from I Series Savings Bonds. You must be at least 24 years old on the first day of the month in which you purchased the bonds. If you are 18 years old, for example, you will not be eligible to use I Series Savings Bonds to pay for your own or your family’s college expenses; you will still be liable for the tax bill. If you are using I Series Savings Bonds to pay for college expenses for a child or another minor you name as a dependent, the bonds must be registered in your name and/or your spouse’s name. You can register your child as a beneficiary of the I Bonds, but you cannot register them as an owner. Otherwise, you will not receive the tax exemption on the I Bonds when used to pay for college costs. If you are married, you and your spouse must file a joint tax return to be eligible for the tax benefits of I Series Savings Bonds. You must meet the income limits set by the Treasury to qualify for tax benefits on I Series Savings Bonds. You may need to do some detailed calculations to determine if you qualify. IRS Form 8815 can help you with that. The college or vocational school or university must meet federal aid criteria, such as the guaranteed student loan program. Otherwise, you will not receive a tax exemption on I Bonds.
Income Limits
For 2021, the interest deduction began to phase out if your modified adjusted gross income was $83,200 or more, and you would not qualify if your modified adjusted gross income was over $98,200. For married couples filing jointly, tax benefits began to phase out if their adjusted gross income was $124,800 or more, and they would not qualify if their modified adjusted gross income was over $154,800.
Comparison of Tax Benefits of I Series Savings Bonds with EE Series Savings Bonds
The tax benefits of I Series Savings Bonds match those of EE Series Savings Bonds. If you hold both as part of your fixed-income portfolio, your calculations should be simpler when the time comes to redeem your bonds and pay the tuition bill.
More Information about I Series Savings Bonds
You can learn more in the I Series Savings Bonds Investment Guide, which will provide you with more information about savings bonds, especially I Series Savings Bonds, and explain how you can add them to your portfolio, annual purchase limits, ownership requirements, tax benefits, and much more.
Questions
Frequently Asked Questions (FAQs)
Where should you report savings bond interest on your tax returns? If your total taxable interest for the year is more than $1,500, you must report the interest on Schedule B of Form 1040. Schedule B is where you provide information about Series I savings bonds, as well as Series E and Series EE bonds. If the interest is less than $1,500, you may only need to report it on the interest line of your tax return.
How can I purchase savings bonds using my tax refund? Form 8888 is used to inform the government what to do with your tax refund. Here you can set up a direct deposit into a bank account, request a paper check, or invest in Series I savings bonds. You can choose any combination of these options, although savings bonds must be purchased in increments of $50.
Source: https://www.thebalancemoney.com/tax-advantages-of-series-i-savings-bonds-357552
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