January 01, 1990
Interest on 1990 Savings Bonds
May Be Tax Free
WASHINGTON - Beginning in
1990 interest on newly purchased series EE United States savings bonds may be tax free if
the proceeds from the bonds are used to pay college tuition.
The IRS said that the bonds must be issued in the name of the taxpayer as sole owner,
or the taxpayer and the taxpayer's spouse as co-owner. The taxpayer may designate any
individual as a beneficiary of the bond. In addition, the proceeds of the bonds can only
be used to pay tuition and required fees at eligible educational institutions.
The IRS also explained that the amount of tax free bond interest is phased-out for
joint return filers with modified adjusted gross income between $60,000 and $90,000 and
between $40,000 and $55,000 for single or head of household filers.
To assist taxpayers in keeping track of these savings bonds, the IRS has developed Form
8818, Optional Form to Record Redemption of College Savings Bonds. Taxpayers can get
copies of the form by calling toll-free 1-800-424-FORM (3676). A copy of the Form 8818 and
instructions is attached.
Notice 90-7, containing more information is attached and will also appear in Internal
Revenue Bulletin 1990-3, dated Jan. 16, 1990.
Administrative, Procedural and Miscellaneous Interest
Exclusion for Qualified United States Savings Bonds Used for Higher Education Expenses
This notice provides guidance to taxpayers who, beginning
January 1, 1990, may purchase series EE United States savings bonds and exclude all or a
portion of the interest on the bonds if the bond proceeds are used to pay qualified higher
education expenses at eligible educational institutions. This interest exclusion is
provided in section 135 of the Internal Revenue Code. Section 135 was added by section
6009 of the Technical and Miscellaneous Revenue Act of 1988.
Qualified United States Savings Bonds.
To be eligible for the exclusion, the bonds must be series EE United States savings
bonds issued after December 31, 1989. The bonds must be issued either in the name of the
taxpayer (sole owner) or in the names of the taxpayer and the taxpayer's spouse
(co-owners). The tax- payer must be at least 24 years old before the date the bonds are
issued. The date the bonds are issued may precede the date the bonds are purchased because bonds are issued as of the first day of the month in which they are purchased. A taxpayer who purchases a qualified bond may designate any individual (including a child) as a beneficiary of the bond (payable on death).
Qualified Higher Education Expenses.
Qualified higher education expenses are limited to tuition and required fees at
eligible educational institutions. The amount of qualified higher education expenses must
be reduced by amounts received as scholarships, fellowships, veteran's benefits, or other
tax- exempt educational benefits. Expenses with respect to any course or other education
involving sports, games, or hobbies, other than as part of a degree or certificate
granting program, are not qualified higher education expenses. Eligible educational
institutions include most public and nonprofit higher educational and post-secondary
educational institutions eligible for federal assistance under the Higher Education Act of
1965 and the Carl D. Perkins Vocational Education Act.
The amount of interest on qualified United States savings bonds excludable under
section 135 of the Code is limited by the amount of redemption proceeds (interest and
principal) used to pay qualified higher education expenses during the same tax year as the
redemption. If the amount of the qualified United States savings bond redemption proceeds
exceeds the amount of the qualified higher education expenses paid in the tax year of
redemption, the amount of excludable interest will be limited. For example, if two-thirds
of the total bond redemption proceeds are used to pay qualified higher education expenses
during the same tax year as the redemption, only two-thirds of the interest portion of the
qualified United States savings bonds redemption proceeds is excludable.
In addition, the interest exclusion is phased out for joint filers with modified
adjusted gross incomes between $60,000 and $90,000. Married individuals need to file joint
returns to claim any interest exclusion. For single filers and heads of households, the
phase-out range is between $40,000 and $55,000. After 1990, these limits will be indexed
for inflation and then rounded to the nearest multiple of $50.00. Modified adjusted gross
income is adjusted gross income modified by adding back certain exclusions for income from foreign sources, certain United States possessions, and Puerto Rico, and after taking into account taxable social security benefits, the IRA deduction, and the passive activity loss limitation.
Taxpayers may use Form 8818, Optional Form to Record
Redemption of College Savings Bonds, to maintain records on redeemed bonds that are
necessary to substantiate this interest exclusion. Form 8818 will be available in I.R.S.
offices in January 1990.
This notice serves as an "administrative
pronouncement" as that term is described in section 1.6661- 3(b)(2) of the Income Tax
Regulations and may be relied upon to the same extent as a revenue ruling or a revenue
The principal author of this notice is Celia Gabrysh of the
Office of Assistant Chief Counsel (Income Tax and Accounting). For further information
regarding this announcement, please contact Ms. Gabrysh at (202) 566-6320 (not a toll-free
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