How Do I Cash in EE Bonds for Education Expenses?
Learn how to redeem EE bonds for education expenses, understand eligibility rules, calculate value, and navigate tax considerations for a smooth process.
EE savings bonds can be a useful way to save for education expenses, offering potential tax benefits when used correctly. These U.S. government-backed bonds earn interest over time and can be redeemed for tuition costs under specific conditions.
Understanding how to cash in EE bonds for education ensures their full value is utilized while avoiding unnecessary taxes or penalties.
Conditions for Using Bonds Toward Tuition
To qualify for tax-free redemption, specific IRS requirements must be met. The bondholder must be at least 24 years old at the time of issuance, meaning parents or guardians typically purchase them rather than students. The bonds must also be redeemed in the same year that qualified education expenses are paid.
The educational institution must be eligible under IRS guidelines, which generally includes colleges, universities, and vocational schools participating in federal student aid programs. Private elementary or high school tuition does not qualify. Covered expenses include tuition and mandatory fees but exclude room and board, books, and transportation. If the redemption amount exceeds qualified expenses, only the portion used for tuition remains tax-free, while the rest is subject to federal income tax.
Income limits determine eligibility for tax benefits. In 2024, the tax exclusion begins to phase out at a modified adjusted gross income (MAGI) of $96,800 for single filers and $145,200 for joint filers, with full ineligibility at $111,800 and $175,200, respectively. These thresholds adjust annually for inflation, so checking the latest IRS guidelines before redemption is necessary.
Calculating Bond Value
EE savings bonds are purchased at face value and earn a fixed interest rate set at issuance. Interest compounds semiannually, meaning every six months, accrued interest is added to the bond’s principal, and future interest is calculated on this new total.
The U.S. Treasury guarantees that EE bonds will at least double in value after 20 years. If the fixed interest rate does not achieve this growth, the government makes a one-time adjustment to ensure the minimum return. Bonds continue earning interest for up to 30 years, after which they stop accruing value and should be redeemed.
The TreasuryDirect website offers a savings bond calculator where bondholders can check the current redemption value by entering the bond’s series, denomination, and issue date. This tool accounts for all accrued interest and provides an accurate estimate of the bond’s worth.
Redeeming with a Bank or Online
EE savings bonds can be redeemed through a financial institution or the U.S. Treasury’s online platform. Many banks and credit unions still cash paper bonds, but policies vary. Some institutions only provide this service for account holders, while others impose limits on the redemption amount per visit. Calling ahead to confirm a bank’s policies can prevent unnecessary trips. A government-issued ID is required, and if the bondholder’s name has changed due to marriage or other legal reasons, additional documentation may be needed.
For electronic EE bonds, TreasuryDirect handles redemptions. Unlike paper bonds, which can be redeemed in any amount, electronic bonds must be cashed in increments of $25 or more while maintaining a minimum balance of one cent. Funds are transferred directly to a linked bank account, typically within one business day. TreasuryDirect also tracks interest earnings, simplifying tax reporting.
Tax Considerations
EE savings bonds offer tax advantages, but proper handling is necessary to maximize benefits. Interest earnings are subject to federal income tax but are exempt from state and local taxes. Taxes are deferred until redemption or final maturity, allowing funds to grow without annual reporting obligations. If the bonds are not used for qualified education expenses, all accrued interest must be reported as taxable income on IRS Form 1099-INT in the year of redemption.
Ownership structure affects tax treatment. If a parent and child are co-owners, the tax liability typically falls on the first-named individual. If a grandparent owns the bond and redeems it for a grandchild’s education, the tax exemption does not apply unless the grandparent’s name is also on the tuition payment. Ensuring ownership and tuition payments align prevents unintended tax consequences.
Documentation for Qualified Education
Proper documentation is required to claim the tax exemption. The IRS requires proof that the funds were used for qualified education expenses.
Form 1098-T, issued annually by educational institutions, details tuition and fee payments. If this form is unavailable, alternative records such as billing statements, canceled checks, or bank statements showing direct payments to the school can serve as proof. The name on these documents should match the bondholder’s name to avoid complications when claiming the tax exclusion.
A record of bond redemption is also necessary. TreasuryDirect provides electronic transaction records, while banks issue receipts for cashed paper bonds. These documents should be retained alongside tax returns for at least three years in case of IRS inquiries. If the bondholder’s income is near the phase-out threshold for tax benefits, keeping a copy of the tax return may help demonstrate eligibility. Ensuring all records are accurate and accessible prevents delays or unexpected tax liabilities.