U.S. Savings Bonds — Series EE Bonds
By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

U.S. Savings bonds are issued by the United States Treasury Department; therefore, they are the obligation of the United States government. Interest on these bonds is not state or locally taxable. Series EE bonds are purchased at half of their face value. For example, if you purchase a bond with a face value of $50, you would pay $25 for the bond. The bonds increase to their face value by the interest paid on the bonds each year. Since Series EE bonds earn market-based rates that change every six months, they can reach face value in less than 30 years, depending on the interest rates being paid by the bond. If a bond pays 6%, it is going to reach face value in 12 years rather than 30 years. Bondholders should redeem their Series EE bonds by the maturity date because the bonds will cease paying interest once they mature. The bondholder is also required to pay tax on the interest in the year the bond is cashed or matures. If you hold the bond past maturity, you will owe tax on the interest accumulated and will owe penalties and interest on the taxes owed. Series EE bonds can be purchased directly through the U.S. Department of Treasury via the Internet, commercial banks or through an employer's payroll deduction.

Using Series EE bonds for Education

The Education Bond Program was started in 1990. Interest on Series EE bonds is totally or partially excluded from federal income tax when the bondholder pays for qualified higher education expenses. The bonds that are eligible for this program are bonds purchased in January 1990 or later. The following are requirements that must be met for the bondholder to exclude the interest paid on the bonds from federal income tax, i.e., participate in the Education Bond Program:

  • The owner must be at least 24 years old on the first day of the month in which the bonds were purchased.
  • When using the bonds for a child's education, the bonds must be registered in one of the parent's name, and the child may be listed as a beneficiary. The child cannot be named as co-owner on the bond.
  • If the adult is using the bond for his or her education, then the bond must be registered in that person's name.
  • Married couples must file jointly to qualify for the exclusion.
  • There are income limits on the exclusion (see below).
  • The principal and interest from the bonds must be used to pay qualified education expenses to be eligible for the tax exclusion.

Income Limitations

The full interest exclusion is available to couples filing jointly and single filers with modified adjusted gross income (which includes interest earned) under the projected 2006 income limits. The amount of interest that can be excluded is phased out in 2006 for households earning $94,700 to $124,700 if a joint return is filed, and $63,100 to $78,100 for all others. These income limits apply to the year that the proceeds from the bond are used for qualified education expenses, not the year the bond was purchased.

Other Limitations

There are limits on the amount of bonds that can be purchased and used for the Education Bond Program. The annual purchase limit is $30,000 face value. There is not a limit on the amount of bonds accumulated for education purposes, as long as you do not purchase more than $30,000 in one year.

Bond Registration

It is the bondholder's responsibility to keep records on bonds purchased, such as serial numbers, interest earned, face amounts and issue dates for the person to claim the income exclusion.

Please note, Series EE bonds can be purchased in a minor's name; however, bonds held in a minor's name cannot participate in the Education Bond Program. If your income is above the threshold amount, you can purchase the Series EE bond in your child's name and benefit from the "kiddie tax law." Bonds purchased in the child's name follow the same rules that apply to custodial accounts.

For more information on Series EE bonds, visit the following web site: www.savingsbonds.gov or contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
 
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