Savings Bond Education Interest Exclusion Guide

What the Savings Bond Education Exclusion Is

The education savings bond program in Internal Revenue Code Section 135 lets ordinary U.S. savings bonds be redeemed tax-free when the money goes toward college. Normally the interest that builds up inside a Series EE or I bond is taxed as ordinary income in the year you cash the bond. Under §135, if you cash a qualifying bond in a year you pay qualified higher education expenses, you can exclude some or all of that interest from your income instead.

The benefit is meaningful but narrow. It applies only to specific bonds, only to tuition and required fees, only when the bond owner was old enough at purchase, and only below an income ceiling. Each of those conditions has caught families off guard, which is why the exclusion is claimed far less often than the number of bonds bought "for college" would suggest.

How It Differs From a 529 Plan

People often lump savings bonds and 529 plans together as "college savings," but the tax mechanics are different. A 529 plan grows tax-free and the distributions are tax-free for a broad list of expenses, including room and board and even K-12 tuition. The savings bond exclusion is narrower: it applies only to tuition and fees for higher education and is subject to an income phase-out a 529 never has. The two interact, though, because contributing bond proceeds to a 529 counts as a qualified expense for §135, a planning move we return to below.

2026 and 2025 Income Limits and the MAGI Phase-Out

The exclusion phases out as modified adjusted gross income rises. Unlike most family benefits, the savings bond phase-out range is not doubled for married couples; only the starting point is higher. The table shows both years.

Under §135(b)(2), the tentative exclusion is reduced by the fraction of MAGI over the lower threshold to the range width. A single filer at $109,300 of 2026 MAGI is $7,500 into a $15,000 range, so half the exclusion is lost. At or above the upper threshold the exclusion is fully phased out. Only the starting thresholds are indexed for inflation under §135(b)(2)(B); the $15,000 and $30,000 ranges are fixed in the statute and do not change from year to year.

A subtle trap: MAGI for §135 is rebuilt on Form 8815 by adding back the savings bond exclusion you are claiming, plus the foreign earned income, foreign housing, and U.S. possessions exclusions. So the very interest you are trying to exclude pushes your MAGI up. A family that looks safely under the threshold on plain AGI can still lose part of the exclusion once MAGI is rebuilt. See how MAGI is constructed in the MAGI Guide and estimate yours with the AGI & MAGI Calculator.

How the Exclusion Is Calculated (Form 8815)

The exclusion is figured on IRS Form 8815, and the calculation runs in a fixed order.

Step 1: Net Your Qualified Expenses (Lines 2 to 4)

Start with total qualified higher education expenses, then subtract tax-free educational benefits: nontaxable scholarships, veterans' education assistance, employer educational assistance, expenses used to claim an education credit, and amounts covered by tax-free 529 or Coverdell distributions. If the net is zero or less, you stop here and no interest can be excluded.

Step 2: Apply the Applicable Fraction (Lines 5 to 8)

Enter your total bond proceeds (principal plus interest) on line 5 and the interest portion on line 6. If your net expenses are at least as large as the proceeds, the fraction on line 7 is 1.000 and all the interest moves forward. If proceeds exceed expenses, the fraction is net expenses divided by total proceeds, and line 8 is the interest times that fraction.

Step 3: Apply the MAGI Phase-Out (Lines 9 to 13)

Enter MAGI on line 9. If it is at or above the year's upper threshold, you stop and exclude nothing. Otherwise the tentative exclusion is reduced by the excess of MAGI over the lower threshold divided by the range.

Step 4: Excludable Interest (Line 14)

Line 14 is the tentative exclusion minus the phase-out reduction. That excludable amount goes to Schedule B (Form 1040), line 3, where it reduces the interest you report. Whatever interest is not excluded - the part lost to the proration and the part lost to the phase-out - is taxable. The Savings Bond Education Calculator performs every one of these steps for you.

Which Savings Bonds Qualify

Only two kinds of bonds qualify under §135(c)(1), and three conditions must all be met.

• Series and date. The bond must be a Series EE bond issued after December 31, 1989, or a Series I bond (all I bonds qualify by series). Series E bonds, Series HH bonds, and EE bonds issued before 1990 do not qualify.
• Ownership. The bond must be issued in your name, or, if you are married, in your name and your spouse's name. A bond issued in a child's name, or co-owned with the child as a co-owner, does not qualify.
• Age at issuance. The owner must have been at least 24 years old before the bond's issue date. The IRS uses the first day of the issue month, so a bond issued the month you turned 24 still fails unless your birthday was before the first.

The age and ownership rules together produce the rule most families get wrong: a bond a parent buys and registers in the child's name does not qualify for either the parent or the child. To use the exclusion for a child's college, the parent (or a grandparent who claims the child as a dependent) must be the owner, with the student simply as the beneficiary of the spending. A child can be named as a beneficiary on the bond registration, which takes effect only on the owner's death, but never as an owner or co-owner if the exclusion is the goal.

What Counts as a Qualified Education Expense

Qualified higher education expenses for §135(c)(2) are tuition and fees required for the enrollment or attendance of you, your spouse, or a dependent you claim, at an eligible postsecondary institution. The definition borrows the eligible-institution test from §529(e)(5), which covers virtually any accredited college, university, or vocational school eligible for federal student aid.

What counts:

• Tuition and required enrollment fees at an eligible institution, for undergraduate or graduate study.
• Contributions to a 529 qualified tuition program or a Coverdell ESA on behalf of yourself, your spouse, or a dependent, under §135(c)(2)(C).

What does not count:

• Room and board, books, supplies, equipment, and transportation.
• Courses involving sports, games, or hobbies unless part of a degree program.
• K-12 tuition (the exclusion is for higher education only, unlike a 529 plan).
• Expenses paid for someone who is not you, your spouse, or your dependent.

Then, under §135(d)(1)-(2), reduce qualified expenses by tax-free scholarships and fellowship grants, veterans' education benefits, employer-provided educational assistance, any expense used to claim an education credit, and any expense covered by a tax-free 529 or Coverdell distribution. The result is your net qualified expenses, and it is that net figure - not gross tuition - that drives the applicable fraction.

Coordination With 529 Plans, Coverdell, and Education Credits

The savings bond exclusion lives in a crowded field of education tax benefits, and the rule that ties them together is simple: the same dollar of expense cannot be used twice.

Education Credits

If you use $4,000 of tuition to claim the American Opportunity Credit on Form 8863, that $4,000 is subtracted from your savings bond expenses. Because the American Opportunity Credit is worth up to $2,500 on $4,000 of tuition - a far higher return per dollar than excluding bond interest - we generally fund the credit first and apply the bond exclusion to the remaining tuition. Compare the credits in the AOTC vs Lifetime Learning Guide or run them in the Education Tax Credit Calculator.

529 Plans and Coverdell ESAs

This coordination cuts both ways. A tax-free distribution from a 529 plan or a Coverdell ESA that covers tuition removes that tuition from your savings bond expense base. But a contribution to a 529 or Coverdell is itself a qualified expense for §135. That makes the 529 the most useful tool for a family holding more bonds than current tuition: cash the bonds, roll the proceeds into a 529 in the same year, exclude the interest now, and spend the 529 later for a broader set of costs. The 529 details are in the 529 Plan Tax Benefits Guide.

Scholarships

Tax-free scholarships and fellowship grants reduce qualified expenses dollar for dollar. A student with a large scholarship may have little net tuition left for the bond exclusion, which is one of the most common reasons the exclusion shrinks. The Scholarship Tax Guide covers when a scholarship is tax-free in the first place.

Who Can Claim the Exclusion

Form 8815 lists four tests, all of which must be met:

• You cashed a qualifying Series EE (post-1989) or Series I bond during the year.
• You paid qualified higher education expenses that year for yourself, your spouse, or a dependent.
• Your filing status is anything except married filing separately.
• Your modified adjusted gross income is below the year's upper phase-out threshold.

The married-filing-separately bar in §135(d)(3) is absolute. There is no living-apart exception, which sets §135 apart from benefits like the adoption credit, where a narrow living-apart rule can rescue a separately-filing spouse. For §135, a married taxpayer simply must file jointly or forfeit the exclusion.

The dependent connection also matters. If the bond owner pays tuition for a child, the child must be the owner's dependent that year for the tuition to count. A parent who has stopped claiming an adult child as a dependent cannot use the exclusion for that child's graduate tuition, even though the parent owns the bonds.

Reporting on Form 8815 and Schedule B

You report the redeemed bond interest as ordinary interest income, then use Form 8815 to carve out the excludable part. The form's line 14 result flows to Schedule B (Form 1040), line 3, where it reduces the total interest you would otherwise report. In effect, you list the full interest and then subtract the exclusion, so the IRS can see both figures.

Recordkeeping is the part people neglect. The IRS expects you to keep a written record of the bonds you cashed - serial numbers, issue dates, and the dates and amounts you received - and the tuition you paid. The financial institution that redeems the bond reports the interest on Form 1099-INT, but it does not know whether you used the money for tuition, so the burden of proving the exclusion is on you. Keep the bond record and the school's billing statement together with the return.

There is no separate election to make and no attachment beyond Form 8815 itself. If you contribute bond proceeds to a 529 or Coverdell to create the qualifying expense, keep the contribution confirmation showing it happened in the same tax year you cashed the bonds.

Common Mistakes That Cost the Exclusion

Most denied or shrunken exclusions trace back to a handful of errors:

• Bond registered to the child. The single most expensive mistake. A bond in the child's name, or co-owned by the child, never qualifies. The owner must have been 24 at issuance.
• Cashing too many bonds. Redeeming a large block of bonds in a year with modest tuition strands most of the interest as taxable through the applicable-fraction proration. Cash only what your net expenses absorb.
• Counting room and board. Only tuition and fees count. Treating room and board as qualified expenses overstates the exclusion and invites an adjustment.
• Ignoring the MAGI add-back. Forgetting that the bond interest itself is added back when rebuilding MAGI on Form 8815 can put a family over the threshold they thought they were under.
• Double-counting tuition. Using the same tuition for an education credit or a tax-free 529 distribution and the bond exclusion is not allowed; each dollar can support only one benefit.
• Filing separately. A married couple that files separately loses the exclusion entirely, with no exception.
• Pre-1990 EE bonds. EE bonds issued before 1990 do not qualify, no matter how the proceeds are used.

Practitioner Insight (LMN Tax Inc.)

Real-World Scenarios

When the Standard Exclusion Rules Do Not Apply

• Bonds in a child's name. A bond registered to a child or co-owned by a child never qualifies, because the owner was not 24 at issuance. No election or workaround fixes this after purchase.
• Married filing separately. A married taxpayer who files separately cannot claim the exclusion at all, with no living-apart exception.
• K-12 tuition only. Unlike a 529 plan, the exclusion covers higher education only. A family using bonds for private K-12 tuition gets no exclusion, though a 529 contribution route may help.
• MAGI add-back over the line. If rebuilding MAGI on Form 8815 (adding back the bond interest and any foreign or possessions exclusions) pushes you over the upper threshold, the exclusion is zero even if your plain AGI was below it.
• Directly-paid scholarships. Benefits paid directly to the school are handled on a specific line of Form 8815. If a scholarship was paid directly to the institution, confirm the line 3 treatment rather than relying on a simple subtraction.
• Bonds not yet matured or not cashed. The exclusion applies only in the year you actually redeem the bond. Holding a bond, or only some of a bond's value, does not trigger anything until redemption.
• Non-dependent student. Tuition for a child you no longer claim as a dependent does not count, even if you own the bonds and pay the bill.

Frequently Asked Questions